Written By: Matt Stringfellow, CPA
In January of 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard that provides private companies with an accounting alternative that is intended to simplify goodwill accounting.
For private companies that do not meet the definition of a “public business entity”, as defined in the standard, they now have the option of adopting the new goodwill standard for annual reporting periods beginning after December 15, 2014. Early adoption is permitted; therefore a private company may apply the standard to its 2014 financial statements, if desired.
Basically, the new standard allows private companies to amortize goodwill on a straight–line basis over a period of ten years (or less in certain circumstances). As you may know, the existing goodwill guidance does not allow for amortization of goodwill, but rather annual tests of impairment. Therefore, this change represents a fundamental shift in the approach to accounting for goodwill for private companies.
The new guidance also applies to existing goodwill, in addition to any new goodwill acquired. Therefore, upon adopting the new standard, a company should assign a remaining useful life to any existing goodwill and begin amortizing on a straight-line basis. The useful life assigned should not exceed ten years.
Goodwill will still need to be tested on an annual basis for impairment (or when triggered), however this may done at an entity-wide level and also may be based on qualitative factors, which should simplify the analysis.
TJS Deemer Dana LLP’s team will continue to monitor private company accounting changes on an ongoing basis. Feel free to reach us with any questions.