The U.S. Financial Accounting Standards Board (FASB) indefinitely postponed the creation of new rules on the accounting and disclosure of goodwill. On June 15, 2022, the Board unanimously voted the goodwill project from its technical agenda, explaining that they were not confident that the current adjustments being considered would result in a substantial improvement to the current rules or bring significant benefits to investors.
Before this adjustment, the decisions of FASB surrounding this issue seemed to be shifting toward a rule where public companies would begin to amortize goodwill over time to zero. However, now, any developments in FASB rules on goodwill are on pause.
What Does This Mean?
Because of this decision, companies can expect to continue with current impairment testing guidelines for their goodwill. Goodwill is an intangible asset recorded after a company performs an acquisition and pays more than the fair value of the identifiable assets and liabilities (or the residual value associated with a transaction). Impairment occurs when the value of that goodwill drops below the value recorded at acquisition, and companies must investigate this annually. Companies also may need to test for impairment more frequently than annually upon the occurrence of an impairment triggering event, namely, an event that threatens the value of that goodwill. These triggering events, as outlined by FASB, can take the following forms:
- Macroeconomic conditions. The value of the goodwill decreases as the general economic condition deteriorates.
- Industry and market considerations. The goodwill decreases in value as its specific market/environment deteriorates.
- Cost factors. The value of the goodwill is negatively affected by factors such as increases in the cost of raw materials or labor.
- Overall financial performance. The goodwill decreases in value as a result of negative or declining cash flows or a decline in actual or planned revenue or earnings.
- Other relevant entity-specific events. The value of the goodwill is negatively affected by other events such as changes in management, key personnel, or business strategy.
- Events affecting a reporting unit. The goodwill undergoes a drop in value because of changes in the composition of net assets or the expectation of disposing of all or a portion of the reporting unit.
- Sustained decrease in share price. The goodwill’s value drops as a result of a decrease in the company’s share price, either in absolute terms or relative to peers.
The FASB’s postponement of any future rules surrounding goodwill and its accounting/disclosure serves as a reminder of the importance of precise and accurate accounting to drive business strategy and clarity to investors.
Impairment testing is critical, and Stout offers resources surrounding best practices for goodwill impairment testing as well as an overview of the current state of impairment testing.