On the Horizon

Accounting for Goodwill Impairment


By the end of 2016, the FASB plans to issue an Accounting Standard Update (ASU) that simplifies the goodwill impairment test while maintaining its usefulness. Goodwill is the residual asset recognized in a business combination after recognizing all identifiable assets acquired and liabilities assumed. Current accounting requires the acquirer to test whether goodwill becomes impaired in subsequent periods.

The upcoming goodwill impairment standard will eliminate the second step of the current two-step impairment test.
The upcoming goodwill impairment standard will eliminate the second step of the current two-step impairment test. The second step currently requires companies to determine the fair value of individual assets and liabilities for each reporting unit to calculate an implied fair value of goodwill. Under the upcoming standard, companies will be required to recognize an impairment of goodwill based on the calculation in the first step, which is the excess of the carrying amount of the reporting unit over the fair value of the reporting unit.

All organizations (other than private companies that have adopted the private company accounting alternative to subsume certain intangible assets into goodwill) will be able to adopt the new standard. Organizations that have adopted the private company accounting alternative for the subsequent measurement of goodwill (but not the private company accounting alternative to subsume certain intangible assets into goodwill) can, but are not required to, adopt the new standard. Public companies that file with the SEC would apply the standard for years beginning after December 15, 2019. All other public companies would apply the standard for years beginning after December 15, 2020; and other organizations would apply it the following year. Early adoption of the guidance will be permitted.

This standard is the first phase of the Board’s project to improve the accounting for goodwill. The Board plans to evaluate the effectiveness of this standard and continue to monitor the IASB’s projects on goodwill and intangible assets before making further decisions on the second phase of the project.

In Phase 2, the FASB would reconsider the subsequent accounting for goodwill—considering whether to retain an impairment-only approach or to eliminate the current impairment model and replace it with another model such as amortization or direct-write off.

More information can be found on the project pages of Accounting for Goodwill Impairment (Phase 1), Subsequent Accounting for Goodwill for Public Business Entities and Not-for-Profit Entities (Phase 2), and Accounting for Identifiable Intangible Assets in a Business Combination.


Business Combinations—Clarifying the Definition of a Business

The guidance would assist organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

By the end of 2016, the FASB plans on issuing an ASU that clarifies the definition of a business by adding guidance that would assist reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

The upcoming standard:
  • Clarifies that to be a business, a set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.
  • Provides a framework with more stringent criteria for sets without outputs to assist preparers when performing their analysis of the set acquired. When a set does not have outputs, a set would need to include employees that perform a substantive process.
  • Narrows the definition of outputs so it is consistent with how outputs are described in the new revenue recognition standard, which describes goods or services provided to customers.
  • Removes the evaluation of whether a market participant is capable of replacing any missing elements of the acquired set.
  • Includes a screen that offers a practical way to determine whether an acquired set is not a business and limits the number of transactions that need to be evaluated under the framework.
Public companies would apply the guidance to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other organizations would apply the guidance to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption of the guidance will be permitted.

More information can be found on the project page.


EITF Project: Restricted Cash


The FASB plans to issue an ASU that improves the classification and presentation of changes in restricted cash on the statement of cash flows.
By the end of 2016, the FASB plans to issue an ASU that improves the classification and presentation of changes in restricted cash on the statement of cash flows.

GAAP currently does not include specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents, other than limited guidance for not-for-profit organizations.

This standard, which is based on a final consensus of the Emerging Issues Task Force (EITF), is intended to reduce diversity in practice. Provisions include:
  • Amounts generally described as restricted cash and cash equivalents will be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows.
  • When cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, companies will be required to disclose those line items and amounts reported within the statement of financial position. The amounts, disaggregated by the line item in which they appear within the statement of financial position, shall sum to the total amount of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows.
  • Organizations shall disclose information about the nature of restrictions on cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Public companies should apply the guidance to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other organizations, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period.

More information can be found on the project page.