As we approach year-end, we are all celebrating that 2020 will finally be over. For some of us though, 2020 will drag on for a few more months as we close the books and complete our annual (and friendly, I might add) audit process. Here are a couple of thoughts worth remembering for our friends who have elected the private company accounting alternative for goodwill.
Under the existing accounting guidance for evaluating goodwill impairment (FASB ASC 350-20-35-30), a company is required to evaluate its goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount (aka “triggering events”). Put more simply, a global pandemic could very well be a triggering event that would require a private company to recognize a goodwill impairment when it occurs. Given the transaction multiples that were present in the M&A market prior to the COVID-19 pandemic, impairment was already going to be on the minds of accountants this year-end, but the intricacies of existing GAAP only served to compound the impairment discussions.
Given the unprecedented circumstances, the FASB appears to have sympathized with private companies and has added a project to its technical agenda to address the challenges that an interim evaluation of triggering events during 2020 would cause for private companies. The existing impairment guidance would be especially punitive to companies that were able to prudently respond to the changing economic conditions and end 2020 on a solid path to recovery despite an interim drop in performance during the year. It would also add cost and frustration to private equity portfolio company audits that would typically adjust EBITDA for any recognized impairment charges in the determination of debt covenant compliance and for year-end portfolio valuation purposes.
The triggering event evaluation alternative that was tentatively decided by the FASB had the following characteristics:
- Provide an accounting alternative that would allow entities within the scope of the guidance to perform a goodwill triggering event evaluation on the annual reporting date only.
- Limit the scope of the alternative to entities that meet the definition of private companies and not-for-profit entities as those terms are defined in the Codification’s Master Glossary.
- Limit the scope of the alternative to entities that report GAAP-compliant financial statements on an annual basis only.
- Limit the scope of the alternative to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles—Goodwill and Other—Goodwill.
- Not limit the guidance to a specified time period, but instead make it available on an ongoing basis.
- Require no additional disclosures beyond the current requirements in Topic 235, Notes to Financial Statements, and Subtopic 350-20.
- The amendments should be applied prospectively.
- The amendments should be effective for annual reporting periods beginning after December 15, 2019. Early application would be permitted for financial statements that have not yet been issued or made available for issuance.
Entities should be allowed an unconditional one-time election to adopt the proposed alternative prospectively after its effective date without assessing preferability under Topic 250, Accounting Changes and Error Corrections.
Accountants know that even a few weeks before year-end the rules can still change, so don’t spike the football and shoot off the fireworks just yet. The FASB issued a proposed Accounting Standards Update on December 21, 2020, and the comment period closes on January 20, 2021. We believe that there is a high likelihood that private companies would be able to take advantage of this relief as a final ASU is expected to be approved before typical 90 and 120-day reporting deadlines and audited financial statements are issued. For companies that are able to take advantage of the proposed relief, the presence of a triggering event at year-end should still be carefully evaluated given the continuing impact of the Covid-19 pandemic, and goodwill impairment should be discussed with your audit team as early in the year-end close process as possible.
Stay tuned to LBMC’s blog for further developments on this and other year-end financial reporting updates.
For more information, contact Matt Smith at firstname.lastname@example.org or 615.309.2382.