Are you a not-for-profit that has acquired another not-for-profit or a for-profit business and as a result has capitalized goodwill or other related intangible assets on your financial statements? If so, you may be interested in taking advantage of FASB’s new simplified guidance on accounting for goodwill, ASU 2019-06, Intangibles – Goodwill and Other (Topic 850), Business Combinations (Topic 805) and Not-for-Profit Entities (Topic 958).
Not-for-profits record goodwill when they acquire another organization for a higher price than the book value of that organization. Goodwill represents unidentifiable assets such as brand name, customer base or good customer relations. Until now, not-for-profits with goodwill on their statement of financial position were required to annually evaluate the value recorded for goodwill and record any impairments that might have resulted from changes in the circumstances which impact the value of the goodwill. The FASB has extended its private company guidance to not-for-profit entities to allow companies to elect to amortize goodwill over a period of 10 years or less and:
- Test for impairment only if a triggering event has occurred; and
- Have the option to elect to test for impairment at the entity level (organization level) versus a reporting unit (activity or business unit level).
This standard is anticipated to simplify the accounting and analysis of goodwill and reduce the complexity for preparers. This election is available only for acquisitions that occur after the effective date of the standard.
What is a triggering event?
When the fair value of goodwill falls below the book value, an impairment has occurred and goodwill is required to be written down through an “impairment.” Examples of triggering events that would require a not-for-profit to test for impairment include the following:
- Poor financial performance (negative cash flows, shortfalls from budgeted performance)
- Increased competitive environment
- Economic downtowns affecting consumer and/or donor base
- Limitations of accessing credit
- Disposition of a program or consolidated entity
- Changes in industry and/or related regulations
The first step in the impairment test is to compare the fair value of the reporting entity to the book value. If the book value is greater than zero and the carrying value is greater than book value, goodwill is not impaired and a write-down is not necessary. However, if the fair value is less than book value, an impairment loss is calculated as the difference and a write-down of goodwill is recorded.
Certain identifiable intangible assets
If your not-for-profit has intangible assets that are capable of being sold or licensed separately as a result of acquiring another company, you may elect to include those assets with goodwill and amortize the asset over 10 years. Examples of customer-related intangible assets include mortgage servicing rights, customer information and noncompetition agreements acquired.
Goodwill accounting policy
If your organization elects the simplified guidance, the accounting policy should clearly state the amortization election, including:
- Identification of organization level of reporting unit impairment election.
- Triggering events that would require an impairment test and the related impairment test process and recording of an impairment loss if required.
Impact on the financial statements
Under this simplified option, not-for-profit organizations will record a charge (expense) to the statement of activities on a straight-line basis for annual amortization depending on the amortization period elected. This is different than existing guidance where a charge to the statement of activities would be made only when an impairment loss has occurred. Not-for-profit organizations should carefully weigh any financial statement impact based on the relevance to intended users of the financial statements when making policy elections allowed under this option.
Transition and effective date
ASU 2019-06 is effective upon issuance. When the accounting alternative is elected:
- Guidance for goodwill should be applied prospectively for all existing goodwill and for all new goodwill generated in acquisitions.
- Guidance for certain identifiable intangible assets should be applied prospectively upon the occurrence of the first transaction within the scope of this alternative.