No. 2014-05
March 10, 2014
What’s inside:
Overview .......................... 1
Appendix ..........................2
Goodwill accounting alternative
FASB and PCC issue final standard for private companies
Overview

On January 16, 2014, the FASB issued Accounting Standards Update (ASU) No. 201402, Accounting for Goodwill. The standard provides private companies with an
accounting alternative that is intended to simplify the goodwill accounting model.

For private companies, the new standard represents a fundamental overhaul of the
existing accounting model for goodwill. A private company that elects to adopt the
alternative will be able to both amortize goodwill and apply a simplified goodwill
impairment test. Adoption of the standard is optional, so a private company can
continue to apply the existing goodwill accounting model.

A company considering adopting the alternative should carefully review the definition
of a public business entity, as defined in ASU 2013-12, Definition of a Public Business
Entity, to ensure eligibility. Before adopting, an eligible private company should
carefully weigh both the impact of applying the standard on its key financial metrics,
and the potential cost of unwinding the accounting and reapplying the existing
goodwill accounting standard if its reporting requirements change because it no
longer meets the definition of a private company.

The standard is effective for annual periods beginning after December 15, 2014 and
interim periods within annual periods beginning after December 15, 2015. Early
adoption is permitted for any annual or interim period for which a company’s
financial statements have not yet been made available for issuance. Therefore, a
private company would likely be able to apply the standard to its 2013 financial
statements, if it so desires.

The appendix to this Dataline discusses the private company goodwill accounting
alternative. It serves as an insert to Chapter 11, “Accounting for Goodwill
Postacquisition – U.S. GAAP,” in our 2013 Global Guide to Accounting for Business
Combinations and Noncontrolling Interests.
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Appendix
11.9
Private company accounting alternative
On January 16, 2014, the FASB and the Private Company Council (PCC) issued ASU
2014-02, Accounting for Goodwill (the “goodwill alternative”). For private companies,
the goodwill alternative represents a fundamental overhaul of the existing accounting
model for goodwill. Application of the goodwill alternative is optional, and a private
company can continue to follow the existing goodwill accounting guidance. An eligible
company that elects the goodwill alternative will be able to apply a simplified
impairment test but also will be required to amortize goodwill.
Only private companies are eligible to elect the goodwill alternative. Companies
considering adoption should carefully review the definition of a public business entity,
as defined in ASU 2013-12, Definition of a Public Business Entity. A company that
meets the definition of a public business entity is not eligible to apply any of the PCC’s
accounting alternatives in its financial statements. Additionally, not-for-profit entities
and employee benefit plans are not eligible to adopt PCC accounting alternatives.
ASU 2013-12 defines a public business entity as a business entity meeting any one of
the following criteria:
a.
It is required by the SEC to file or furnish financial statements, or does file or
furnish financial statements (including voluntary filers), with the SEC
(including other entities whose financial statements or financial information
are required to be or are included in the filing).
b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or
rules or regulations promulgated under the Act, to file or furnish financial
statements with a regulatory agency other than the SEC.
c.
It is required to file or furnish financial statements with a foreign or domestic
regulatory agency in preparation for the sale of or for purposes of issuing
securities that are not subject to contractual restrictions on transfer.
d. It has issued, or is a conduit bond obligor for, securities that are traded, listed,
or quoted on an exchange or an over-the-counter market.
e.
It has one or more securities that are not subject to contractual restrictions on
transfer, and it is required by law, contract, or regulation to prepare U.S.
GAAP financial statements (including footnotes) and make them publicly
available on a periodic basis (for example, interim or annual periods). An
entity must meet both of these conditions to meet this criterion.
An eligible private company is required to make an accounting policy election if it
intends to adopt the goodwill alternative. The alternative is effective for annual
periods beginning after December 15, 2014 and interim periods within annual periods
beginning after December 15, 2015. Early adoption is permitted for any annual or
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interim period for which a company’s financial statements have not yet been made
1
available for issuance .
The PCC is addressing accounting alternatives in other areas as well. A private
company will generally be able to choose which of the accounting alternatives it will
adopt, and will not be required to adopt all of the accounting alternatives being
offered just because it adopts one or more of them. However, if the goodwill
alternative is adopted, a private company must apply all provisions of ASU 2014-02
prospectively to all of its existing and future goodwill. Therefore, if a company elects
to adopt the goodwill alternative for impairment testing, it must apply the standard’s
2
amortization guidance .
Question 11-01
What factors should a private company consider before deciding whether it will adopt
the goodwill alternative?
PwC response
A company should carefully consider whether it currently meets the definition of a
public business entity and whether it expects to meet that definition in the future. If a
company that is private today later meets the definition of a public business entity (for
example, due to a public offering of the company’s securities), it will no longer be
eligible to apply the goodwill alternative and will be required to retrospectively adjust
its historical financial statements to apply the requirements of the existing goodwill
accounting guidance.
In addition to determining whether it is eligible to adopt the goodwill alternative, a
company should also assess the impact a transition to the goodwill alternative will
have on its key financial metrics, particularly those affecting its debt covenant
compliance. While a company’s EBITDA will not likely be impacted by adoption of the
goodwill alternative, other key measures of performance such as net income,
operating income, net assets and retained earnings will be affected.
Key differences between the goodwill alternative and the existing goodwill impairment
guidance are summarized in Figure 11-01.
1
Under the guidance in ASC 855, Subsequent Events, financial statements are available to be issued
when they are complete in a form and format that complies with GAAP and all approvals necessary for
issuance have been obtained.
2
A private company that elects to adopt the goodwill alternative will be required to amortize the portion of
the difference between the cost of an investment accounted for on the equity method and the amount of
underlying equity in net assets of the equity method investee that is recognized as goodwill. Additionally, a
private company should consider what impact, if any, the amortization of goodwill will have on its
accounting for deferred tax assets and liabilities.
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Figure 11-01
Key differences between the goodwill alternative and the existing goodwill guidance
Goodwill alternative
Existing goodwill guidance
Amortization
Requires goodwill to be
amortized on a straight-line basis
over a period of ten years, or less
in certain circumstances
Does not allow goodwill to be
amortized
Level of
testing for
impairment
assessment
Either entity-wide or reporting
unit (policy election upon
adoption of the accounting
alternative)
Reporting unit
Frequency of
impairment
assessment
Upon occurrence of a triggering
event
At least annually, and between
annual tests whenever a
triggering event occurs
Measurement
of
impairment
Single step test, which compares
the fair value of the entity (or
reporting unit) to its carrying
amount
Two-step test. In the first step,
the fair value of each reporting
unit is compared to its carrying
amount. If the fair value of the
reporting unit is less than its
carrying amount, a second step is
used to measure any impairment.
This second step requires the
preparation of a hypothetical
purchase price allocation to
determine the implied fair value
of goodwill. The impairment, if
any, is the amount by which the
carrying amount of the reporting
unit’s goodwill exceeds its
implied fair value
Allocation of
impairment
Impairment charge allocated to
separate amortizable units of
goodwill using either a pro rata
allocation based on relative
carrying amounts of goodwill or
another reasonable and rational
basis
Impairment charge allocated at
the reporting unit level
Disposal of
business that
constitutes a
portion of an
entity (or
reporting
unit)
Goodwill allocated to disposed
business using a reasonable and
rational approach
Goodwill allocated based on the
relative fair value of the business
disposed of to the portion of the
reporting unit being retained
The remainder of this section addresses the provisions of the goodwill alternative.
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11.9.1
Amortization of goodwill
A company should amortize goodwill on a straight-line basis over ten years, or less
than ten years if the company demonstrates that another useful life is more
appropriate [ASC 350-20-35-63]. The amortization guidance applies to existing
goodwill, whether it resulted from a business combination or application of fresh-start
reporting, at the adoption date as well as any new goodwill arising subsequent to
adoption.
Upon adoption, a company should assign a useful life to its existing amortizable
units of goodwill as of the beginning of the period of adoption and begin amortizing
the goodwill on a straight-line basis from the beginning of the period. Assigning a
remaining useful life of ten years to all existing goodwill on the adoption date, unless a
shorter useful life is more appropriate, is intended to simplify the accounting. In no
circumstances is a company permitted to assign a useful life in excess of ten years to
its goodwill. Example 11-01 illustrates how a company should transition to the
goodwill alternative.
Example 11-01
Transition to goodwill alternative
Company A, which is eligible to apply the PCC’s accounting alternatives, elects to early
adopt the goodwill alternative in its year ended December 31, 2013 financial
statements. On January 1, 2013, the beginning of the year of adoption, Company A has
goodwill of CU100. Company A concludes that it will assign a useful life of ten years to
this goodwill balance, without further analysis of the life, as a practical expedient.
Analysis
Assuming there are no impairments or disposals during 2013, Company A should
record CU10 of goodwill amortization expense in operating expenses for the yearended December 31, 2013.
11.9.1.1
Amortization after initial adoption
A company should assign a useful life to new goodwill arising after initial adoption on
an acquisition-by-acquisition basis, thus creating separate amortizable units of
goodwill. A useful life of ten years can be assigned to a new amortizable unit of
goodwill as a practical expedient. As with existing goodwill on the adoption date, a
company has the option to assign a shorter useful life to a new amortizable unit of
goodwill if it demonstrates that the goodwill has a shorter useful life. The
determination of the useful life of goodwill should be made separately for each
amortizable unit of goodwill.
A company may revise the remaining useful life of each of its amortizable units of
goodwill upon the occurrence of an event or change in circumstance that could
indicate a different remaining useful life is more appropriate. The cumulative
amortization period of any single amortizable unit of goodwill cannot exceed ten
years. Therefore, if an individual amortizable unit of goodwill is initially assigned a
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useful life of ten years, it may be appropriate in certain circumstances to subsequently
shorten the life, but in no circumstances should the useful life be extended beyond a
total life of ten years. If the estimated remaining useful life of an amortizable unit of
goodwill is adjusted, the change would be treated as a change in accounting estimate,
and thus applied on a prospective basis from the date the useful life is adjusted [ASC
350-20-35-64].
11.9.2
Impairment model
The goodwill alternative simplifies many aspects of the goodwill impairment model
for private companies by changing the level at which the impairment assessment is
performed, when the test is performed, and how an impairment charge is calculated.
The goodwill alternative does not change the order in which goodwill is assessed for
impairment. The order of impairment testing is described in BCG 10.4.1.4 and BCG
10.4.2.1.
11.9.2.1
Level to test goodwill for impairment
Goodwill may be assessed for impairment at the entity-wide level or at the reporting
unit level. The level at which to test goodwill for impairment is a policy election that is
required to be made on the date the goodwill alternative is adopted. If a company
elects to assess goodwill for impairment at the reporting unit level, it will continue to
follow the existing goodwill model to determine its reporting units, assign assets and
liabilities to its reporting units, and allocate goodwill to its reporting units. See BCG
11.2, 11.3 and 11.4 for more information about these topics. If a company elects to
assess goodwill for impairment at the entity-wide level, a determination of the
company’s reporting units is not necessary.
11.9.2.2
Frequency of impairment testing
The impairment assessment is a trigger-based assessment, whereby a company is only
required to test goodwill for impairment if an event occurs or circumstances change
that indicate that the fair value of the entity may be below its carrying amount or the
fair value of a reporting unit may be below its carrying amount depending on the level
at which the test is performed based on the accounting policy adopted [ASC 350-2035-66]. A company is no longer required to assess goodwill for impairment on an
annual basis.
The goodwill alternative does not change the examples of events and circumstances,
identified in BCG 11.5.1.1, that indicate that the fair value of the entity (or reporting
unit) may be below its carrying amount. However, those examples are not meant to be
all-inclusive. As part of its analysis of potential triggering events, a company should
consider other factors that could impact the fair value of the entity (or reporting unit),
the extent to which each of the identified adverse events or circumstances impact the
entity’s (or reporting unit’s) fair value, the presence of any positive or mitigating
factors that impact fair value, and, if applicable, the results of any recent fair value
calculations [ASC 350-20-35-68].
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11.9.2.3
The goodwill impairment test
Upon the occurrence of a triggering event, a company is permitted to first assess
qualitative factors to determine whether it is more likely than not that the fair value of
the entity (or the reporting unit) is less than its carrying amount, including goodwill.
The qualitative assessment, commonly referred to as “step zero,” applied in the
goodwill alternative is the same as the qualitative assessment under the existing
goodwill impairment guidance. See BCG 11.5.1.1 for a discussion of how to apply the
qualitative impairment test. An entity is also permitted to bypass the qualitative
assessment and proceed directly to the quantitative test. If a company elects to bypass
the qualitative assessment, or, after performing the qualitative assessment concludes
that it is more likely than not that the fair value of the entity (or reporting unit) is less
than its carrying amount, it should proceed to a quantitative impairment test.
Similar to step one under the existing goodwill impairment guidance, a company
should compare the fair value of the entity (or reporting unit) to its carrying amount,
which includes goodwill. If the fair value exceeds the carrying value, no impairment
loss exists. If the fair value is less than the carrying amount, a goodwill impairment
loss is measured and recorded.
Consistent with the existing goodwill impairment guidance, when determining the fair
value of the entity (or reporting unit), a company will need to determine whether the
entity (or reporting unit) would be bought or sold in a taxable or nontaxable
transaction. However, when performing the single step impairment test, a company
should include its deferred income taxes in the carrying amount of the entity (or
reporting unit), regardless of how the fair value of the entity (or reporting unit) is
determined (i.e., whether the entity (reporting unit) would be bought or sold in a
taxable or nontaxable transaction) [ASC 350-20-35-76].
11.9.2.4
Measurement of an impairment loss
A goodwill impairment loss is measured as the amount by which the carrying amount
of the entity (or reporting unit) exceeds its fair value. However, the impairment loss
cannot exceed the entity’s (or reporting unit’s) carrying amount of goodwill [ASC 35020-35-73]. A hypothetical application of the acquisition method to calculate implied
goodwill (step two) is not required.
Question 11-02
A company elects to continue to assess goodwill for impairment at the reporting unit
level and measures an impairment loss in one reporting unit that exceeds the carrying
amount of that reporting unit’s goodwill. Should the company allocate the excess
amount to the goodwill in its other reporting units?
PwC response
No. For a company that assesses for impairment at the reporting unit level, the
measurement of any impairment loss is limited to the carrying amount of goodwill in
that reporting unit. Therefore, if the calculated impairment loss for any single
reporting unit is greater than the carrying amount of the reporting unit’s goodwill, the
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company should not allocate the remaining difference to its other reporting units.
Separately, the company should assess its long-lived assets for impairment before
assessing goodwill for impairment.
Example 11-02 demonstrates measurement of an impairment loss under the goodwill
alternative.
Example 11-02
Measurement of an impairment loss
Company A has elected to assess its goodwill for impairment at the entity-wide level.
During 20x4, Company A experiences a decline in its consolidated earnings and
operating cash flows, and on June 30, 20x4, concludes that it is more likely than not
that the fair value of the entity has fallen below its carrying amount. Before assessing
its goodwill for impairment, Company A assessed its long-lived assets and determined
there were no impairments. On June 30, the carrying amount of Company A’s
consolidated net assets is CU950, which includes goodwill of CU200.
Analysis
Company A is required to assess its goodwill for impairment on June 30, 20x4, the
date it has determined that the fair value of the entity may be below its carrying
amount. On that date, Company A should determine the fair value of the consolidated
entity using the same measurement principles described in ASC 350-20-35-22
through 35-27 (i.e., the existing guidance for determining the fair value of a reporting
unit). Company A concludes that its fair value is CU800. Therefore, Company A’s
carrying amount exceeds its fair value by CU150. Company A should recognize a
goodwill impairment loss of CU150, thus reducing the carrying amount of its goodwill
to CU50.
Alternatively, if the carrying amount of Company A’s goodwill was CU100 on June 30,
20x4, the impairment loss would be limited to CU100, because the total impairment
loss cannot exceed the carrying amount of goodwill.
Question 11-03
How should a company with a negative carrying amount at the entity (or reporting
unit) level measure a goodwill impairment loss?
PwC response
The goodwill alternative does not specifically address how a company should test
goodwill for impairment when the goodwill resides within a reporting unit with a
negative carrying amount, or the goodwill is being tested for impairment at the entitywide level and the entity has a negative carrying amount. For areas not addressed in
the goodwill alternative, an entity should continue to follow the applicable
requirements of the existing goodwill accounting and reporting model [ASC 350-2005-6]. Therefore, it would appear that in these circumstances, the guidance in ASC
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350-20-35-8A should be followed. See BCG 11.5.3 for more discussion of the
impairment test for entities (or reporting units) with zero or negative carrying
amounts.
11.9.2.5
Allocation of an impairment loss
A company should allocate the goodwill impairment loss to individual amortizable
units of goodwill of the entity if it tests for goodwill impairment at the entity-wide
level, or to amortizable units of goodwill within the impaired reporting unit if it tests
for goodwill impairment at the reporting unit level. Therefore, the level at which a
company assesses its goodwill for impairment will determine how a goodwill
impairment charge is allocated to the separate amortizable units of goodwill. A
company is permitted to allocate the impairment loss on a pro rata basis using the
relative carrying amounts of its separate amortizable units of goodwill. While a
company may allocate the impairment loss using another reasonable and rational
basis, entities generally should use the pro rata allocation method unless there is clear
evidence supporting a specific identification of the impairment loss to one or more
amortizable units of goodwill.
After the goodwill impairment charge is allocated to individual amortizable units of
goodwill, the adjusted carrying amounts of the individual units should be amortized
over their respective remaining useful lives [ASC 350-20-35-78]. Example 11-03
demonstrates allocation of a goodwill impairment loss to amortizable units of
goodwill.
Example 11-03
Allocating an impairment loss to amortizable units of goodwill on a pro rata basis
Company A assesses goodwill for impairment at the entity-wide level. Upon a
triggering event in 20x5, Company A performs the goodwill impairment test and
determines that it has a goodwill impairment loss of CU100 that it needs to allocate to
its three amortizable units of goodwill.
Goodwill origin
Goodwill carrying
amount before
impairment loss
Remaining useful
life at impairment
test date
Unit 1
Existing goodwill on
adoption date
CU300
5 years
Unit 2
20x3 acquisition
CU150
8 years
Unit 3
20x4 acquisition
CU50
9 years
Company A determines that the impairment loss will be allocated to its three
amortizable units of goodwill on a pro rata basis using their relative carrying amounts.
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Analysis
Since it is using a pro rata allocation, Company A should allocate 60% of the
impairment loss, or CU60, to Unit 1, 30% of the impairment loss, or CU30, to Unit 2,
3
and 10% of the impairment loss, or CU10 to Unit 3 . The allocation of the impairment
loss impacts the amount of amortization expense that will be recognized in each future
period.
11.9.3
Disposal considerations
When a company disposes of a business that is part of an entity (or reporting unit),
the goodwill associated with that business should be included in the carrying amount
of the business in determining the gain or loss on disposal [ASC 350-20-40-9].
The amount of goodwill to allocate to a disposed business should be determined using
a reasonable and rational approach. A relative fair value approach would generally be
considered a reasonable and rational approach. Other approaches may be considered
reasonable and rational, depending on a company’s specific facts and circumstances.
Under the existing guidance, the amount of goodwill to allocate to the business to be
disposed of is determined based on the relative fair values of (i) the business being
sold and (ii) the portion of the reporting unit that will be retained unless the business
to be disposed of was never integrated into the reporting unit (see BCG 11.6). In most
cases it is difficult to establish that the benefits of the acquired goodwill were never
realized by the rest of the reporting unit. Therefore, the relative fair value approach
generally will be the most appropriate method of allocating goodwill to a disposed
business for companies adopting the goodwill alternative.
11.9.4
Presentation and disclosure
ASC 350-20-45 and ASC 350-20-50 describe the presentation and disclosure
requirements under the goodwill alternative, which are generally consistent with the
disclosures required under the existing goodwill model. Key differences include the
removal of the requirement for a company to disclose a tabular reconciliation of the
beginning balance, ending balance, and activity in the goodwill balance from period to
period, and the addition of a requirement to disclose the weighted-average
amortization period of goodwill.
4
Excerpts from ASC 350-20-45-5 through 45-7 :
3
The total carrying amount of goodwill is CU500. Unit 1’s goodwill represents 60% [CU300 / CU500] of the
total, Unit 2’s goodwill represents 30% [CU150 / CU500] of the total, and Unit 3’s goodwill represents 10%
[CU50 / CU500] of the total.
4
The excerpts in this section have been reproduced from paragraphs ASC 350-20-45-5 through 45-7 and
ASC 350-20-50-4 through 50-7 of the FASB’s Accounting Standards Update 2014-02, Accounting for
Goodwill (Topic 350). The FASB material included in this work is copyrighted by the Financial Accounting
Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
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Excerpt from ASC 350-20-45-5
The aggregate amount of goodwill net of accumulated amortization and impairment
shall be presented as a separate line item in the statement of financial position.
Excerpt from ASC 350-20-45-6
The amortization and aggregate amount of impairment of goodwill shall be presented
in income statement line items within continuing operations (or similar caption)
unless the amortization or a goodwill impairment loss is associated with a
discontinued operation.
Excerpt from ASC 350-20-45-7
The amortization and impairment of goodwill associated with a discontinued
operation shall be included (on a net-of-tax basis) within the results of discontinued
operations.
Excerpts from ASC 350-20-50-4 through 50-7:
Excerpt from ASC 350-20-50-4
The following information shall be disclosed in the notes to financial statements for
any additions to goodwill in each period for which a statement of financial position is
presented:
a.
The amount assigned to goodwill in total and by major business combination or
by reorganization event resulting in fresh-start reporting
b. The weighted-average amortization period in total and the amortization period by
major business combination or by reorganization event resulting in fresh-start
reporting.
Excerpt from ASC 350-20-50-5
The following information shall be disclosed in the financial statements or the notes to
the financial statements for each period for which a statement of financial position is
presented:
a.
The gross carrying amounts of goodwill, accumulated amortization, and
accumulated impairment loss
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b. The aggregate amortization expense for the period
c.
Goodwill included in a disposal group classified as held for sale in accordance
with paragraph 360-10-45-9 and goodwill derecognized during the period without
having previously been reported in a disposal group classified as held for sale.
Excerpt from ASC 350-20-50-6
For each goodwill impairment loss recognized, the following information shall be
disclosed in the notes to the financial statements that include the period in which the
impairment loss is recognized:
a.
A description of the facts and circumstances leading to the impairment
b. The amount of the impairment loss and the method of determining the fair value
of the entity or the reporting unit (whether based on prices of comparable
businesses, a present value or other valuation technique, or a combination of
those methods)
c.
The caption in the income statement in which the impairment loss is included
d. The method of allocating the impairment loss to the individual amortizable units
of goodwill.
Excerpt from ASC 350-20-50-7
The quantitative disclosures about significant unobservable inputs used in fair value
measurements categorized within Level 3 of the fair value hierarchy required by
paragraph 820-10-50-2(bbb) are not required for fair value measurements related to
the financial accounting and reporting for goodwill after its initial recognition in a
business combination.
Questions?
Authored by:
PwC clients who have questions about this
Dataline should contact their engagement
partner. Engagement teams who have
questions should contact the Business
Combinations team in the National
Professional Services Group (1-973-2367801).
Lawrence Dodyk
Partner
Phone: 1-973-236-7213
Email: lawrence.dodyk@pwc.com
John Stieg
Senior Manager
Phone: 1-973-236-7057
Email: john.c.stieg@us.pwc.com
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