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Accounting for Goodwill for private Companies Becomes Easier

By: Carl Kampel

 

The Financial Accounting Standards Board issued final guidance on an accounting alternative that allows private companies to amortize goodwill acquired in a business combination and to use a simpler one-step impairment test. The standard allows private companies to elect to amortize goodwill on a straight-line basis over 10 years and perform a simpler one-step impairment test at either the entity level or the reporting unit level. It also allows a private company to amortize goodwill over a period shorter than 10 years if it can demonstrate that another useful life is more appropriate. Because of the inherent difficulties in predicting the actual pattern in which goodwill provides benefits to a company, goodwill is required to be amortized on a straight-line basis. The alternative also simplifies the goodwill impairment test. A private company that elects to amortize goodwill will be required to perform a one-step impairment test at either the entity level or the reporting unit level, only when an event or circumstances indicate that the fair value of the entity (or reporting unit) may be less than its carrying amount. Any impairment would be recognized for the difference between the fair value of the entity (or reporting unit) and its carrying amount. The amount of the charge would be limited to the entity’s (or reporting unit’s) carrying amount of goodwill. That alternative should reduce the cost and complexity of performing the goodwill impairment test. Private companies that elect to test goodwill for impairment at the entity level also will be able to avoid the costly and complex process of identifying reporting units and allocating assets, liabilities and goodwill to them for impairment testing purposes. Companies that elect this alternative would have to apply it to all existing goodwill and goodwill generated in future business combinations. The standard is effective for annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. Early application is permitted. If a company has not yet made its financial statements available for issuance for the most recent annual or interim period, it can elect to apply the alternative in those financial statements. This means that most private companies will be able to apply the alternative in their 2013 financial statements. Companies that elect this alternative would have to apply it to all existing goodwill and goodwill generated in future business combinations. The standard is effective for annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015. Early application is permitted. If a company has not yet made its financial statements available for issuance for the most recent annual or interim period, it can elect to apply the alternative in those financial statements. This means that most private companies will be able to apply the alternative in their 2013 financial statements.

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