On May 30, the Financial Accounting Standards Board (FASB) issued an accounting standard that enables not-for-profit organizations to use the easier, less costly methods available to private companies for reporting goodwill and certain identifiable intangible assets.
The latest FASB update is effective immediately. It’s designed to give donors and other users of nonprofits’ financial reports more comparable information about how certain types of acquired intangible assets fared in the long run following a merger and acquisition (M&A) transaction.
How to report goodwill and other intangibles
In an M&A, goodwill is one of the intangible assets that are acquired. It’s determined by deducting from the selling price the fair values of tangible assets, identifiable intangible assets and liabilities obtained in the purchase. Goodwill becomes impaired if its fair value falls below its carrying value.
Under existing U.S. Generally Accepted Accounting Principles (GAAP), organizations that merge with or acquire another business must identify and recognize the fair value of goodwill and other intangible assets that are separable or arise from contractual or other legal rights. Valuing intangibles can be costly, subjective and complex, often requiring the use of third-party appraisers and increasing audit costs.
Under GAAP, entities must test goodwill and other indefinite-lived intangibles annually for impairment. They also must test for impairment if a so-called “triggering event” happens, such as:
- A decline in economic conditions,
- Increased competition,
- Loss of key personnel, and
- Regulatory action.
In 2014, the FASB issued the following two alternatives that allow private companies to use simplified post-M&A financial reporting methods for goodwill and certain other intangible assets:
- Accounting Standards Update (ASU) 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill, and
- ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination.
ASU 2014-02 allows private companies to opt out of doing an annual goodwill impairment test and, instead, write off goodwill on a straight-line basis over a 10-year period (or less if a shorter period is more appropriate). ASU 2014-18 allows private companies to subsume into goodwill any acquired noncompete agreements and customer-related intangible assets that aren’t capable of being sold or licensed independently from the other assets of a business. If that election is made, goodwill must be amortized, however.
It’s important to note that these alternatives are optional. Moreover, even if an entity elects to amortize goodwill, it still must test for impairment if a triggering event happens. And, an entity can elect to amortize goodwill without electing to subsume noncompetes and certain intangibles into goodwill.
Extending the private company alternatives
Now, the FASB has issued ASU 2019-06, Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities. Its name says it all: The update effectively extends ASUs 2014-02 and 2014-18 to not-for-profits.
The update doesn’t amend the guidance in the private company alternatives. So, like the alternatives for private companies, it retains the provisions for triggering events, requiring nonprofits to test for impairment in such circumstances. Not-for-profit entities also have the option to elect to test for impairment at the entity level.
Not-for-profit goodwill arises less frequently than for-profit goodwill. The not-for-profit variety stems from two general types of transactions: 1) when a not-for-profit acquires a for-profit entity, and 2) when a not-for-profit acquires an entity in a net deficit position and the combined entity is predominantly supported by fee-for-service revenues.
Though the update applies to all not-for-profits, it’s especially meaningful to some nonprofit hospitals and health care facilities. In recent years, nontraditional players — such as Amazon, Walmart and Apple — have entered the health care arena, potentially driving M&A activity among nonprofit health care entities.
Implementing the changes
Not-for-profits have the same open-ended effective date and unconditional one-time election that private companies had. In addition, the transition methods are the same for not-for-profits and private companies. That is, the accounting alternative for all existing goodwill and for all new goodwill generated in M&As by not-for-profit entities should be applied prospectively. And the option to subsume certain intangibles into goodwill for not-for-profits should be applied prospectively upon the occurrence of the first transaction that’s within the scope of the alternative.
Contact an accounting professional if you have questions about these accounting alternatives. He or she can help you decide whether one (or both) make sense for your entity’s M&A transaction.