NFP Relief on Goodwill Accounting

Complaints from private companies about the cost and complexity of goodwill impairment testing resulted in the issuance of two Accounting Standards Updates (ASU), 2014-02 and 2014-18, which simplified the accounting for goodwill and certain identifiable intangible assets in a business combination. These reliefs only applied to nonpublic companies. FASB has issued ASU 2019-06, which extends these accounting policy elections to not-for- profit (NFP) entities. If elected, an NFP could amortize goodwill over 10 years or less on a straight-line basis. Under the second election, an NFP could include all employee noncompete agreements in goodwill. The amendments are effective immediately.

A separate FASB project will address potential goodwill relief for public entities that could affect the relief offered under this proposal. This project is in its initial phase; an invitation to comment is expected in 2019. BKD will continue to follow this project.

Scope The amendments would only change the scope of the existing private company alternatives and not any of the provisions, i.e., subsequent measurement, derecognition, presentation and disclosures. The changes apply to all NFPs as defined in the FASB Master Glossary, including those that are conduit bond obligors.

Goodwill Accounting Alternative Under current guidance, an NFP’s goodwill must be tested for impairment at least annually. An entity has the option to first perform a qualitative assessment to determine whether it is more likely than not—a likelihood of more than 50 percent—that a reporting unit’s fair value is less than its carrying amount. No further testing is required if the qualitative assessment indicates there is less than a 50 percent chance fair value is less than carrying amount. If the qualitative assessment indicates it is more likely than not that goodwill is impaired, an entity must proceed to step one of the goodwill impairment test and compare the carrying amount—including goodwill—of the reporting unit with its fair value. Then an entity must calculate the amount of the impairment by comparing the implied fair value of the NFP’s goodwill with its carrying amount. NFPs that elect the proposed goodwill accounting alternative would amortize goodwill over a 10-year period or less and perform a one-step impairment test only when an impairment indicator exists. NFPs would make an accounting policy election to perform the impairment test at either the entity level or the reporting unit level. The optional quantitative assessment is retained.

Goodwill Accounting Alternative Current ASU 2019-06 Amortization Not permitted Amortize over 10 years or less Impairment Assessments Annual and trigger-based Trigger-based only Impairment Assessment Level Reporting unit Entitywide or reporting unit Impairment Testing Two-step approach One-step approach Assessment Type Optional qualitative assessment Optional qualitative assessment Disposal of a Reporting Unit or Allocate goodwill on a relative fair Allocate goodwill using a reasonable Nonprofit Activity value basis and rational approach

NFP Relief on Goodwill Accounting

Intangible Asset Accounting Alternative The second accounting alternative in Topic 805, Business Combinations, would apply when an NFP is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following transactions entered into after the effective date: . Applying the acquisition method under Topic 805 (or Subtopic 958-805, Not-for-Profit Entities—Business Combinations) . Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the equity method under Topic 323, Investments—Equity Method and Joint Ventures . Adopting fresh-start reporting under Topic 852, Reorganizations Under current guidance, an entity must separately recognize identifiable intangible assets that meet either the separability or contractual-legal criterion. However, under the accounting alternative, an NFP acquirer shall not recognize separately from goodwill the following intangible assets: . Customer-related intangible assets unless they are capable of being sold or licensed independently from other assets of a business . Noncompetition agreements

NFPs that elect the intangible asset accounting alternative would recognize fewer intangible assets in an acquisition, and they would be required to elect the goodwill accounting alternative.

Intangible Asset Accounting Alternative Current ASU 2019-06 Customer-Related Intangible Recognize separately from goodwill if Do not separately recognize and Assets it meets either the contractual-legal measure customer-related intangible or separability criterion assets in a business combination (unless they are capable of being sold or licensed independently) Noncompete Agreements Recognize separately from goodwill if Do not separately recognize and it meets either the contractual-legal measure certain noncompete or separability criterion agreements in a business combination

Transition & Effective Date An NFP would apply the accounting alternative in Topic 350, if elected, prospectively for all existing and new goodwill generated in acquisitions by NFPs. An NFP would apply the accounting alternative in Topic 805, if elected, upon the occurrence of the first transaction within the alternative’s scope. These are one-time elections, but they can be made at any time after the effective date. NFPs electing these alternatives do not have to demonstrate preferability.

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For additional information, contact your BKD trusted advisor.

Contributor Anne Coughlan Director 317.383.4000 [email protected]

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