Goodwill. Often a key part of any merger or acquisition, this intangible asset has been the subject of some scrutiny over the past few years. Part of nearly any merger or acquisition, the last few M&A-filled years have resulted in a lot of this showing up on balance sheets.

According to Armanino, Goodwill is typically associated with the premium the buyer of a business or asset pays over the fair value of the identifiable assets acquired. It’s an intangible asset that may be linked to things like a target company’s customer loyalty or business reputation.

The value of goodwill is determined by deducting, from the cost to buy a business, the fair value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase. Investors are interested in goodwill because it enables them to see how an acquisition fared in the long run.

Increasing Use of Goodwill in M&A Resulting in Increasing Goodwill Impairments After M&A

In fact, according to the Duff & Phelps 2019 U.S. Goodwill Impairment Study released in November 2019, 2018 was a record year for M&A activity, with several large transactions driving deal value to surpass levels seen in 2015, the previous peak period. However, with boatloads of goodwill often comes the corollary to the transaction—goodwill impairment, the charges companies record when goodwill’s carrying value on their financial statements exceeds its fair value.

Over the last few years, we’ve watched both climb steadily, and the Financial Accounting Standards Board (FASB) has been looking to update their guidance.

Unfortunately, this has created a challenge in which goodwill write-offs have been unexpected and left many investors unprepared for the implications, leading to an FASB seeking changes to the practice.

Could Public Companies Adopt a New Approach?

Last year, the FASB issued an Invitation to Comment (ITC) that assumed the high cost of goodwill impairment testing exceeds the benefit to investors, and that change was necessary. Looking for some way to help investors make sense of goodwill, the FASB has spent the last year looking at options including the 10-year amortization approach used by private companies.

The goal of this letter was to answer the following:

  • Should the subsequent accounting for goodwill be changed, and, if so, how could the FASB do so cost effectively?
  • Should the FASB modify the recognition of intangible assets in a business combination so that items such as noncompete agreements or certain customer-related intangible assets are subsumed into goodwill?
  • Should disclosures about goodwill and other intangible assets be added, changed or deleted?
  • To what extent does lack of comparability between public, private and not-for-profit entities in the reporting of goodwill and certain recognized intangible assets reduce the usefulness of financial reporting information?

As noted in the Wall Street Journal,

“A change to the rules has the potential to affect all companies, not just public companies, which still lack the amortization option. To make a decision, the FASB has been studying the cost-effectiveness of the current rule and held a public roundtable in November. Many companies have said the existing rules for goodwill burden them with unnecessary costs and are too subjective. Going into the new year, the board expects to continue public discussions on the subject.

The impact of several new accounting standards on both companies and investors will also play out over the next year. The delays of several standards—on lease accounting, hedge accounting, current expected credit losses, long-term insurance contracts—give many companies at least the next year to prepare for changes.”

What’s Next?

The rules for goodwill will continue to change, especially in the uncertain market presented by the recent lockdowns. We hope to keep you up to date on all the latest changes to this standard, exploring in greater detail the FASB letter. Stay tuned for all the latest.

Additional Resources

Is Goodwill Accounting Broken?

Tips for Controllers Looking to Build an Effective Relationship with the Audit Committee

FASB Delays RevRec and Lease Adoption for Private Companies