The FASB has been looking quite a lot at Goodwill lately. First, they changed the impairment testing standard to allow an option of performing a qualitative test first. While most public companies did not use this option, up to 30% of all companies (public and private) used the standard for at least some of their reporting units in 2012. One of the biggest complaints about the qualitative test was not the test itself, but how the auditors were interpreting the requirements of the standard which resulted in almost as much or more work as performing a step one test in the first place.
The second action was taken by the Private Company Council (PCC) and recently approved by the FASB to allow private companies the option of simply amortizing goodwill over a default 10 year or other more appropriate period. The amortization option would eliminate the required annual impairment test and only require an impairment test when certain triggering events occur; much like the way impairment testing for PP&E is handled today.
The PCC action caused the FASB to relook at the whole concept of goodwill and how it should be accounted for in the financial statements. The FASB recently met to discuss possible options and the discussion was truly far ranging from whether goodwill is an asset at all to keeping it as an asset but changing the why we look at and test for impairment.
The question of goodwill being an asset is an interesting one. When it comes to goodwill as a distinct asset, you can’t buy it or sell it, but clearly companies paying more than the fair value of the hard and intangible assets of a company are buying something. The questions are does that “something” diminish in value over time and should that “something” be supported solely by the acquired business or can you build new businesses that continue to support that value in the future. Current accounting for goodwill would seem to answer those questions with a maybe and a yes. Impairment would indicate the value can diminish, but because we don’t amortize goodwill, the diminishment is not a given. In addition, the way goodwill is tested at the reporting unit level (rather than the acquisition unit level for example) would indicate that we believe goodwill can be supported by new businesses only tangentially related to the business acquired that created the goodwill in the first place.
The FASB has instructed its staff to look further into the issues around goodwill accounting by completing research on two alternatives to today’s accounting for goodwill. The first is a simplified one-step impairment test process and the second is a much more radical direct write-off approach (although not necessarily through the income or comprehensive income statements).
The FASB is dealing with lots of questions about the costs and benefits of current goodwill accounting. Goodwill impairments seem to have little to no impact on stock price which would seem to mean that there is little value (benefit) in the information provided by a goodwill impairment. On the other hand, a direct write-off may eliminate important information of the return on assets that investors need to know and understand.
While not as impactful as revenue recognition, lease accounting or financial instruments, the accounting for goodwill might bring out the passionate accounting purest viewpoints much like happens whenever the topic of the accounting for share-based compensation is brought up. (If you want to start an argument with another technical accountant just take the position that share-based compensation is 100% expense or 100% an equity transaction see what happens). This one might be worth keeping an eye on as the FASB continues to revisit the issue throughout this year.
I attended my last AICPA Council meeting as a member of the Board of Directors last week. While it was not quite as eventful as my first Council meeting it definitely had its moments. The first Council meeting I attended was highlighted by the proposed move of the AICPA operations from New Jersey to North Carolina. The Fall 2013 meeting covered issues from Private Company Financial Reporting to the National Debt Crisis to the AICPA’s pension fund impact on its finances. I will discuss each of those in a little more detail below.
The Council heard from Billy Atkinson, Chairman of the newly formed Private Company Council (PCC). Billy has a long career serving private companies as a member in public practice, but also was one of two dissenting votes on the Blue Ribbon Panel recommendations. FAF recently named him Chairman and Billy provided insight into his view of the work ahead for the PCC. Billy pointed out that work on the framework for when differential standards should exist is a critical first step for both the FASB and the PCC. When pressed on what types of differences he supports, Billy suggested that when it comes to measurement and recognition, any suggested changes may need to be made for all entities and it would be his inclination to first seek for the FASB to review the recognition and measurement issues overall.
We then heard from David Morgan, Chairman of the AICPA Financial Reporting Framework (FRF) Task Force which is creating a standards framework for Small and Medium enterprises. The framework is essentially an enhancement of OCBOA, and will not be considered GAAP, but should offer a comprehensive reporting alternative for small private businesses that do not intend to go public someday. Success of the FRF will depend on educating users – business owners and their bankers – of small business reporting on the higher usefulness of the FRF for small businesses. You can expect to see an exposure draft covering the entire FRF in the next month.
Paul Stebbins reported on the escalating crisis around our national debt. Did you know we are already on a trajectory that is worse than Spain, second only to Greece in the debt crisis triage center? Only record low interest rates are keeping our interest payments somewhat in check. If we return to anything close to normal interest rates our interest payments will explode and we will quickly be paying over a trillion dollars a year in interest alone which doesn’t pay for a single program.
There was also a discussion on AICPA finances that was focused mainly on the impact of the pension plan on AICPA’s reported results. Like every organization with a defined benefit pension plan, declining interest rates have significantly increased the liability, and therefore deficit, reported by the AICPA. This is a non-cash charge and even if interest rates never go back up, the ERISA required cash funding will be paid in over a number of years at a rate the AICPA can afford without negatively impacting the ability to serve its members. The AICPA has already taken a number of proactive steps including freezing the pension plan starting in 2017, and will continue to look at additional alternatives to “de-risk” its pension plan in the future.
While this was my last Council meeting as a member of the AICPA Board of Directors, I was asked to serve an additional year on Council, filling the last year of a three year term ending in October 2013. It was a privilege to serve on the Board of Directors and I am honored the AICPA wants me to stay involved at the Council level. I look forward to continuing to update you on Council activities as well as the many issues impacting our profession into 2013.