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FASB proposes goodwill impairment relief

Dec 22, 2020

For organizations with goodwill, one of the many impacts of COVID-19 may be goodwill impairment — or at least a requirement to assess whether or not an impairment occurred.

As economic activity across the country and globe stalled around the end of Q1 and the beginning of Q2 2020, the accounting requirements around goodwill may likely have led organizations to conclude that a triggering event occurred. In that case, the organization would, as of the date of the event, make an assessment of the fair value of its operation. If at that time management determined that the fair value had fallen below the operation’s carrying value, a goodwill write-down would have been required.

It is possible that some or perhaps many organizations did not immediately perform this assessment. However, that does not relieve them of this requirement. If management determines that a triggering event occurred, such organizations would still need to conduct an impairment test as of the date of the triggering event (back in Q1 or Q2), without consideration of subsequent 2020 events or operating results.

Examples of a triggering event include: deterioration in general economic conditions, restrictions on access to capital, deterioration in specific industries/markets, a change in the market for the organization’s products or services, and negative or declining cash flows/revenues/earnings, among others.

In any case, this constitutes a challenging accounting exercise with potentially detrimental effects on financial results, on top of what has already been a difficult year for many.

What has the FASB proposed changing?

To provide private companies and nonprofits with some flexibility that should reduce the cost and complexity of impairment testing, the Financial Accounting Standards Board (FASB) released an exposure draft for an accounting alternative on December 21, 2020. This alternative would allow qualifying organizations to perform a triggering event evaluation on the year-end reporting date only. FASB has limited this relief to private companies and nonprofits that only report on an annual basis.

After a brief 30-day comment period, FASB is expected to vote on approving the new standard in early 2021. The proposal would be effective for years beginning in 2020, with early adoption available.

What does this mean?

Qualifying organizations with goodwill that have not completed an impairment analysis would be advised to monitor this proposal. If approved, qualified organizations could avoid the cost and challenge of a COVID-19-triggered mid-year impairment analysis, and instead consider at the end of its fiscal year whether an impairment analysis is necessary.

No more would the organization have to consider only the information as of the depths of the financial crisis. Instead the analysis would be performed at year-end and may result in a different conclusion depending on the organization’s financial condition and fair value determination at that time. Therefore, it may be beneficial to hold off on issuing your financial statements until this standard is finalized to be able to take advantage of the alternative.

If you have any questions about the proposed accounting alternative and how it may impact you, contact us.

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Zachary D. Mayer, CPA
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