On May 30, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities.
The amendments in ASU 2019-06 extend the scope of the goodwill accounting alternative provided in ASU 2014-02 and the intangible asset accounting alternative provided in ASU 2014-18 to not-for-profit entities–including conduit bond obligors–and are intended to reduce cost and complexity for financial statement preparers.
In 2014, the FASB issued ASU 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill and ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, which provided private companies with accounting alternatives to simplify the subsequent accounting for goodwill and certain identifiable intangible assets acquired in a business combination.
As originally issued, those accounting alternatives were only available to private companies, and not available to not-for-profit entities. However, the FASB acknowledged the concerns expressed by private companies in regard to the cost and complexity of the goodwill impairment test and the accounting for identifiable intangible assets also pertained to not-for-profit entities. As a result, the FASB added a separate project to their agenda to evaluate whether the alternatives should also be available to other types of entities.
For more background, see our Alerts on ASU 2014-02 and ASU 2014-18.
Provided below is a summary of the goodwill and intangible asset accounting alternatives guidance. The amendments in this update extend the scope of these two accounting alternatives to not-for-profit entities—including conduit bond obligors—and don’t otherwise amend the provisions of the accounting alternatives guidance in Topic 350 and Topic 805.
The FASB chose not to distinguish between public not-for-profits and nonpublic not-for-profits in the scope of the amendments. Accordingly, the accounting alternatives in the ASU are available to all not-for-profit entities, including conduit-bond obligors with publicly-traded debt.
The FASB also has an ongoing, broader project on their agenda to revisit the subsequent accounting model for goodwill and identifiable intangible assets for all entities. As such, the guidance per ASU 2019-06 may be amended at a future time.
Instead of testing goodwill for impairment annually at the reporting unit level, a not-for-profit entity may now elect the goodwill accounting alternative to:
- Amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate
- Make a policy election to test goodwill for impairment at either the entity level or the reporting unit level
- Test goodwill for impairment only when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount
Identifiable Intangible Assets
Instead of separately recognizing most intangible assets at fair value on the transaction date, a not-for-profit entity may now elect the intangible asset accounting alternative to subsume the following intangible assets into goodwill:
- Customer-related intangible assets that aren’t capable of being sold or licensed independently from the other assets of the business
- Noncompetition agreements acquired in an acquisition
The goodwill accounting alternative must be elected if the intangible asset accounting alternative is elected. However, the goodwill accounting alternative may be elected without electing the intangible asset accounting alternative.
The amendments are effective immediately. Similar to the existing private company accounting alternatives’ guidance, not-for-profit entities electing the goodwill and intangible asset accounting alternatives don’t have to demonstrate preferability and the accounting alternatives’ transition guidance under Topic 350 and Topic 805 should be followed, as summarized below.
Goodwill Accounting Alternative Transition
Upon election of the goodwill accounting alternative, the guidance should be applied prospectively, as follows:
- New goodwill: Accounting alternative guidance is to be applied prospectively for goodwill recognized after accounting alternative is adopted
- Existing goodwill: Accounting alternative guidance is to be applied at the beginning of the first fiscal year after the accounting alternative is adopted and existing goodwill is to be amortized prospectively on a straight-line basis
Intangible Asset Accounting Alternative Transition
Upon election of the intangible asset accounting alternative, the guidance should be applied prospectively to in-scope transactions occurring after the accounting alternative is adopted. The accounting alternative guidance doesn’t apply to existing intangible assets, as such, existing customer-related intangible assets and noncompetition agreements can’t be subsumed into goodwill.
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