The Financial Accounting Standards Board voted Wednesday to move ahead with making what it has called “targeted improvements” to its standards for the accounting treatment of goodwill.
The new project will address both the level of the company at which goodwill will be tested for impairment and how often the testing is required.
Before the board voted, FASB staff detailed its recommended changes. They proposed eliminating the requirement that companies test for impairment annually, and suggested requiring goodwill to be tested at the operating segment level of a company rather than at the reporting unit level as is currently required.
“Testing at the operating segment level would simplify the model, reduce the preparer and audit burden and better align impairment testing with existing financial reporting structure and how management evaluates performance,” a staff member told the board during the meeting.
Goodwill is an intangible asset that arises when a company acquires a business or entity for more than its fair market value, according to the Corporate Finance Institute. Under current generally accepted accounting principles, companies must annually recalculate the value of goodwill assets to determine whether any impairment has occurred.
The U.S. accounting standards setter’s decision to add the project to its rule-setting technical agenda comes about four years after it dropped another goodwill project that had explored, allowing companies to amortize, or write down, goodwill impairments to zero over time, CFO Dive previously reported.
Ditching the annual test drew support from a number of board members, including from FASB Vice Chair Hillary Salo.
“Given the regulatory environment that we are in, companies and auditors spend an exorbitant amount of time doing an annual impairment test, testing the projected financial information that goes into that, the controls around the process ….these are areas of significant challenges and significant cost. So I certainly would be supportive of removing the annual impairment test to help reduce costs,” Salo said during the meeting.
But Salo, who noted that goodwill is always a “hot topic” and one to which people bring a lot of perspectives, said she was concerned that having tests tied to a triggering event instead of a routine annual check could be complicated.
After members cast their votes during a wide-ranging discussion, FASB Chair Richard Jones stated that the majority of the board voted for the project. He proposed that the next step would entail asking staff to gather more information about the cost implications of the proposed changes.
