The Financial Accounting Standards Board (FASB) recently extended relief for goodwill and intangible asset accounting to not-for-profit organizations. Accounting Standard Update (ASU) 2019-06 will allow not-for-profit organizations to access the same simplified approach to these two issues that private companies have been granted.
Both accounting for goodwill and accounting for certain intangible assets in business combinations have long been flagged as difficult and costly for entities of all types and sizes. The FASB’s Private Company Council pushed the Board to provide accounting alternatives for private companies, and the FASB created these alternatives in its ASUs 2014-02 and 2014-18.
ASU 2019-06 permits all not-for-profit organizations to use the accounting alternatives in ASU 2014-02 and 2014-18 effective immediately. The following provides a closer look at the accounting simplification elections not-for-profits will have at their disposal.
Goodwill Accounting Simplification
Prior to the release of ASU 2019-06, not-for-profit organizations had to test their goodwill for impairment annually at the reporting unit level. Not-for-profit organizations’ stakeholders had questioned whether the annual test for goodwill impairment required by ASC Topic 350 provided financial statement users with enough relevant information to justify the time and expense of performing the test.
The accounting alternative that was provided to private companies in ASU 2014-02 permits an entity to amortize goodwill on a straight-line basis over 10 years (less if demonstrated to be more appropriate). Entities electing the accounting alternative choose an accounting policy to test for impairment at an entity level or at the reporting unit level. An impairment test is only performed when a triggering event occurs that indicates the fair value of the entity is below its carrying amount.
When the triggering event occurs, the entity can first perform a qualitative test that compares the entity’s fair value with its carrying amount, including goodwill. If the qualitative test indicates it’s more likely than not that goodwill is impaired, the entity will not have to perform further tests.
Not-for-profit organizations that elect the accounting alternative for goodwill must also make an accounting policy election to test for the impairment at either the entity or reporting unit level. Other than the elimination of a requirement to provide a tabular reconciliation of changes in goodwill, disclosures under the accounting alternative are not substantially different.
Accounting for Intangible Assets in a Business Combination
Not-for-profit organizations had been required to recognize most assets and liabilities in a business combination at their fair value as of the acquisition date. This includes identifiable intangible assets, which can include:
- Assets that arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the acquired business
- Assets that are separable (or capable of being separated) from the entity being acquired, regardless of whether the entity intends to separate, sell, transfer, license, rent, or exchange those assets.
When elected, the accounting simplification will allow not-for-profit organizations to recognize fewer items as separate intangible assets during an acquisition. Not-for-profit organizations will include in goodwill any customer-related intangible assets that are not capable of being sold or licensed independently. In addition, any noncompetition agreements that are acquired as part of the business combination will be subsumed into goodwill.
Not-for-profit organizations that make the election to simplify the accounting for intangible assets in a business combination must also make the election to simplify accounting for goodwill. Conversely, if a not-for-profit makes the election to simplify accounting for goodwill, it is not required to make the election to simplify accounting for the acquisition of intangible assets.
How the Accounting Changes Benefit Not-For-Profit Organizations
The accounting simplifications are designed to reduce the cost and complexity for goodwill and intangible asset accounting for not-for-profit organizations. Once the election to use one or both of the accounting simplifications is made, not-for-profit organizations will use the accounting simplification going forward.
For more information about how the standard changes affect your organization, please contact us.
Mark Winiarski is a Financial Services Director in the Kansas City office. He can be reached at 913.234.1656 or firstname.lastname@example.org.