- The Financial Accounting Standards Board (FASB) halted a four-year effort to revamp how companies account for goodwill, with some board members indicating that the case made for a revision was not strong enough to justify an overhaul.
- “This would be a very significant change,” FASB Chair Richard Jones said at a board meeting. “I think you need a case for change and, as I see it, as this is stacking up, it doesn’t assemble.”
- FASB since 2018 appeared to be trending toward a change allowing companies that buy another business to amortize, or write down, goodwill impairments to zero over time. The rulemakers Wednesday unanimously decided to remove the project from their technical agenda, while saying they may take it up again at a later date.
Goodwill arises when a company acquires another business for more than its book value. Under generally accepted accounting principles, companies must annually recalculate the value of goodwill assets to determine whether any impairment has occurred.
Many CFOs in 2020 reconsidered how they approach impairment testing for goodwill as the pandemic intensified and extreme market volatility complicated efforts to assess fair value and future cash flows.
FASB considered changing the process for such recalculations, which some companies considered to be subjective and too costly. Under one approach, a company world forgo annual tests and instead write down a predetermined portion for impairment of goodwill each year.
FASB’s decision not to alter accounting for goodwill benefits investors and others who rely on company financial statements, according to P.J. Patel, Co-CEO of Valuation Research Corp. He estimates that public companies have $3.6 trillion of goodwill on their balance sheets.
“Scrutiny would have decreased” under the proposed changes to accounting for goodwill in acquisitions, Patel said. “Companies would have been amortizing that value and there would have been no information that would have been gained for users or investors and, quite frankly, the discipline would have been reduced.”
The current approach to goodwill, while having some drawbacks, leads to “good accounting,” he said. As company valuations rose during recent years, CFOs, controllers and accountants have intensified scrutiny of mergers and acquisitions.
“There’s a lot of thought that goes on within companies in the deal-making process,” Patel said, citing post-deal requirements to test for impairment.
Board members at best voiced ambivalence about changing goodwill accounting.
“I still feel like this is something that will need to get addressed but I'm not convinced right now that it has to be the top priority,” Marsha Hunt said. She advocated “taking a pause.”
Jim Kroeker cautioned his fellow rulemakers not to overreach.
“Are we trading one set of challenges with a different set of challenges?” he said. “At least in my own mind I need to try and avoid what I would call a standard-setting hubris of thinking my answer is better than all of the answers we’ve tried in the past.”