FINANCIAL REPORTING Bruce Pounder, CMA, CFM, Editor

Accounting for Goodwill: Back to the

Dissatisfaction with present ac - counting standards for goodwill Good Old Days? has prompted standards setters and their constituents to look to not-for-profit entities. In such these reasons, financial-statement the past for potential relief. transactions, goodwill reflects the users often ignore goodwill when extent to which the acquisition analyzing financial statements and price paid for the acquired entity, make a corresponding mental de - as a whole, exceeds the sum of the duction from the reporting enti - ccounting for goodwill has individual fair values of the enti - ty’s equity. Additionally, preparers Along been controversial. ty’s net assets (i.e., assets less lia - and users of financial statements Much of the controversy has re - bilities). That measurement ap - have ex pressed concerns about the volved around the recognition and proach has led to goodwill being cost and complexity of the good - measurement of goodwill assets described as the amount by which will-impairment testing that cur - that arise from business combina - “the whole is greater than the sum rent accounting standards require. tions. Significant changes to ac - of its parts.” counting standards for such assets Both U.S. GAAP and IFRS con - Walking It Back were made in the early 2000s, but sider goodwill to be an intangible The current accounting treatment preparers, auditors, and users of asset that has an indefinite useful of goodwill is relatively new. Be - financial statements continue to life. As such, it isn’t systematically fore the Financial Accounting press for change. In most cases, amortized to expense over time Standards Board (FASB) issued the change that those stakeholders like other intangible assets, but it Statement of Financial Accounting are seeking is essentially a rever - must be tested regularly for im - Standards No. 142 (SFAS No. 142), sion to previous standards. This pairment. In practice, goodwill al - “Goodwill and Other Intangible column will explore recent actions most always gets written down Assets,” in 2001 and the Interna - that standards setters have taken over time as a result of impair - tional Accounting Standards toward reinstating “traditional” ment testing, and it often becomes Board (IASB) issued IFRS 3, accounting for goodwill. significantly impaired relatively “Business Combinations,” in 2004, soon after its initial recognition. goodwill was amortized and not Background Investors, creditors, and other continually subject to costly and Unlike other assets, goodwill can’t users of financial statements have complex impairment testing. stand alone—it isn’t separable or questioned the usefulness of re - In recent years, there have been distinct from the reporting entity porting goodwill. Goodwill has no several standards-setting initiatives as a whole. Under U.S. Generally realizable value by itself. It can’t be that have effectively revived this Accepted Accounting Principles used as collateral for borrowing. older accounting treatment for (GAAP) and International Finan - And under current accounting goodwill. For example, in July cial Reporting Standards (IFRS), standards, the measurement of 2009, the IASB published the “In - goodwill is recognized only as a goodwill subsequent to its initial ternational Financial Reporting result of a business combination recognition involves significant es - Standard for Small and Medium- or similar transaction involving timation and judgment. For all sized Entities” (IFRS for SMEs). As

July 2013 I STRATEGIC FINANCE 15 FINANCIAL REPORTING

I explained in my September 2009 published a “Feedback Statement” column, “A Game-Changer for that summarized responses the Small-Business Accounting,” the Group obtained from a question - IFRS for SMEs is a complete set of naire about the measurement of country-neutral financial account - goodwill subsequent to its initial ing and reporting standards for recognition. The Statement, avail - entities that lack public account - able at www.efrag.org , does an ex - ability, which are typically smaller cellent job of summarizing the than entities that are publicly ac - thinking of diverse stakeholders countable. Under the IFRS for on key issues related to goodwill SMEs, goodwill must be amor - accounting. tized over its estimated useful life, Will contemporary accounting with a maximum amortization standards for goodwill eventually period of 10 years. be considered a “failed experi - More recently, on June 10, 2013, ment”? It’s too soon to say for the FASB endorsed, for purposes sure. But based on the present of public exposure, a recommen - sentiments of participants in the dation by its Private Company financial reporting supply chain, Council (PCC) to modify U.S. future goodwill-accounting stan - GAAP such that a private com pany dards may bear a greater resem - could elect to amortize goodwill blance to past standards. SF over a period not to exceed 10 years. The PCC’s recommendation Bruce Pounder, CMA, CFM, also included simplified impair - DipIFR (ACCA), is director of ment testing for goodwill. Professional Programs for Loscalzo On the same day, the American Associates, Ltd., a division of Institute of Certified Public Ac - SmartPros Ltd. You can reach him countants (AICPA) released a new at [email protected] . non-GAAP set of accounting stan - dards called the “Financial Report - ing Framework for Small and Medium-Sized Entities” (FRF for SMEs). The Framework requires that goodwill be amortized over the same period as that used for federal income tax purposes—or, if not amortized for federal in - come tax purposes, then a period of 15 years. Furthermore, the Framework doesn’t require good - will to be tested for impairment.

Outlook Debate and discussion about alter - natives to current goodwill ac - counting continue. On June 7, 2013, the European Financial Re - porting Advisory Group (EFRAG)

16 STRATEGIC FINANCE I July 2013