By Courtney Corallo, Business Assurance & Advisory Services Manager | Not-for-Profit Team
In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill, and ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. These Updates simplified subsequent accounting for goodwill and the accounting for certain identifiable intangible assets in a business combination for private companies. The Updates were due to concerns expressed about the cost and complexity of the goodwill impairment test and the accounting for certain identifiable intangible assets. When the FASB issued both Updates in 2014, it acknowledged that the issues were not limited to private companies.
On May 29, 2019, the FASB issued ASU No. 2019-06, effective immediately, to extend the scope of the accounting alternatives provided in ASUs 2014-02 and 2014-18 to not-for-profit entities. The Update is not meant to amend the guidance in the alternatives.
This Update simplifies the accounting for goodwill and intangible assets for not-for-profit entities by allowing the following:
- A not-for-profit entity can now amortize goodwill on a straight-line basis over 10 years, or less than 10 years if deemed appropriate (Topic 350).
- For transactions occurring after the adoption of the alternative, a not-for-profit entity can now include in goodwill and amortize all noncompetition agreements acquired and certain customer-related intangible assets incapable of being sold or licensed independently (Topic 805). If this election is made, Topic 305 must also be elected and goodwill must be amortized.
Prior to this Update, a not-for-profit entity had to test goodwill for impairment annually at the reporting unit level. Not-for-profits now have the option to elect to test for impairment at the entity level or at the reporting unit level. The Update requires a not-for-profit entity to test goodwill for impairment only when a triggering event occurs.
Examples of triggering events include:
- Declines in economic conditions
- Changes in key management or loss of key personnel
- Regulatory changes, and
- Any other events that indicate that the fair value of the entity (or reporting unit) may be below its carrying amount.
Additionally, subsequent to Topic 805, a not-for-profit entity may recognize fewer items as separate intangible assets under an acquisition.
The goal of this Update was to provide easier, less costly methods for reporting goodwill and certain intangibles for not-for-profit entities active in mergers and acquisitions (M&A). Further, donors and other financial statement users may get more comparable information about how certain acquired intangibles fared in the long run subsequent to an M&A. This Update may prove meaningful at a time when nontraditional players have entered the healthcare arena, potentially driving M&A activity among some nonprofit hospitals and healthcare facilities.
For further information, please reference Not-for-Profit Proposal to Allow Goodwill Amortization.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.