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PCC Standards for Goodwill: What Valuation Specialists Need to Know

Valuation-specialists-goodwillA new standard establishing how private companies account for goodwill is not expected to cause immediate challenges for valuation specialists, but the impact could be more significant if the new rules are adopted for public companies down the road.

The standard is the work of the Private Company Council, an advisory group to the Financial Accounting Standards Board formed last year to address possible necessary changes to U.S. GAAP for non-issuers.  On Nov. 25, the FASB endorsed a PCC proposal to provide alternative accounting for goodwill by private companies. Goodwill typically arises from business combinations. In financial reporting, goodwill is the residual amount remaining after the fair values of all identified assets acquired less liabilities assumed have been subtracted from the acquisition price.

Private companies had expressed concerns about the cost and complexity of testing goodwill for impairment under the existing accounting standards.  Many users of financial statements believe that the costs associated with impairment tests outweigh any benefit.  Preparers have similar concerns about the fair value measurement of acquired intangible assets.

Under the new PCC alternative, private companies can elect to amortize goodwill over 10 years, or for a shorter period if they can demonstrate that it is more appropriate. If they do amortize, goodwill would be tested for impairment only when a triggering event occurs.  The standard will be effective for fiscal years beginning after Dec. 15, 2014, but early adoption is permitted. The new rule is not required and private companies can elect to continue testing goodwill for impairment annually.

Under the new standards, a private company may also elect to test for impairment only when a triggering event occurs using a one-step test at the entity rather than reporting unit level. The private company would measure the fair value of the entire entity and compare it to its carrying value. If fair value is less than its carrying value, the difference would be the amount of impairment.

The PCC elections would benefit private companies that are making acquisitions but do not have foreseeable plans to go public. However, there are a number of issues that a private company should consider before electing this alternative. An entity that makes the election and subsequently undergoes an IPO may have to restate its financial statements, a cost that would greatly outweigh any benefit of making the election. Acquisition by a public company or by a private equity firm with an IPO exit strategy would also potentially require restatement. There may also be restatement consequences if the private company expects to report using IFRS either after U.S. adoption or after an acquisition by a foreign entity.

The change in accounting should have a marginal impact on valuation specialists, particularly in the short term. First, many entities may choose to stick with the current standards, since the cost of compliance with them will be lower than the potential cost of restatements if the election is made and has to be reversed. Second, most private and public entities wrote off their impaired goodwill after the 2008 financial crisis. Third, many private companies making the election would be the same entities that have been performing an analysis under the qualitative assessments (Step Zero), which often do not require an outside valuation specialist. 

Valuation specialists should be aware, however, that after endorsing the proposal for private companies, the FASB added an agenda item for next year to consider the same alternative for public companies. If the FASB approves similar accounting for public companies, then the impact on valuation specialists would be much more severe. With that in mind, this continues to be an area worth watching.

The AICPA Accounting and Valuation Guide: Testing Goodwill for Impairment is a valuable tool for auditors, accountants and valuation specialists seeking an advanced understanding of the accounting, valuation and disclosures related to goodwill impairment testing.

Mark L. Zyla, CPA/ABV, CFA, ASA, Managing Director, Acuitas, Inc. Mark is author of Fair Value Measurements: Practical Guidance and Implementation second ed., published by John Wiley & Sons in 2013 and the instructor for the AICPA Fair Value Measurements Workshop.

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