Valuers stress concerns about goodwill impairment vs. amortization

BVWireIssue #207-1
December 4, 2019

goodwill, goodwill impairment, impairment testing, intangible

The last issue of BVWire covered the morning session of the full-day roundtable discussion at FASB headquarters on the standard-setter’s Invitation to Comment (ITC) on moving from the current impairment model for goodwill to one of amortization or a hybrid approach. The afternoon session covered the same agenda but with a new set of individual players from a range of stakeholders that included valuation professionals, users of financial information (including investors), auditors, preparers, academics, standard-setters, and regulators. Here are some of the main points made by roundtable participants:

  • A representative from the user community echoed remarks from the earlier session that the information that emanates from material goodwill impairments is important for investors and other users of financial reports—and the information is not completely retroactive. Impairments trigger ancillary conversations about what’s going on in the company that may impact future performance.
  • Instead of moving to amortization, additional steps could be taken to further reduce the burden of impairment testing on public companies, such as testing at the operating segment rather than reporting unit level, changing the threshold that triggers impairment testing, and decreasing some of the more subjective aspects of impairment testing that are time-consuming and costly.
  • Valuation experts cautioned against the idea of subsuming other intangible assets into goodwill before it gets amortized. These assets, particularly intellectual property (e.g., patents and trademarks), often have long lives that cannot be assigned a definitive lifespan. These assets are also frequently licensed or sold separate and apart from the business combination. Subsuming noncompete agreements would be relatively favorable as they are not typically material in terms of the overall purchase price.
  • A hybrid approach of goodwill amortization with impairment testing could work if the impairment test is simplified, such as using a trigger-based test.
  • Disclosures about an acquired business and its subsequent performance should be enhanced, but the requirements for these improved disclosures should be predicated on the model chosen for goodwill accounting.

What’s next: The FASB is conducting a very thorough process in laying out the issues and soliciting comments from a wide variety of stakeholders. After all the feedback is processed and a presentation is made to the FASB board, the next step will be taken. This usually involves the issuing of an exposure draft that would go through one or more revisions before rules are finalized. This is a very deliberate process that can take up to several years to complete.

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