Extending Private Company Accounting Alternatives on
Certain Identifiable Intangible Assets and Goodwill
to Not-for Profit Entities
Accounting Standards Update 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
On May 30, 2019, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that extends all the elements of the private company alternatives (issued in Accounting Standards Updates No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, to not-for-profit entities.
Under the accounting alternative in Topic 350, a not-for-profit entity has an option to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the not-for-profit entity demonstrates that a shorter useful life is more appropriate. A not-for-profit entity that elects this accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. A not-for-profit entity is required to test goodwill for impairment when a triggering event occurs that indicates that the fair value of the entity (or a reporting unit) may be below its carrying amount.
Under the accounting alternative in Topic 805, for transactions occurring after adoption of the alternative, a not-for-profit entity should subsume into goodwill and amortize customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business and all noncompetition agreements acquired. A not-for-profit entity that elects the accounting alternative in Topic 805 is required to adopt the alternative in Topic 350 to amortize goodwill. However, a not-for-profit entity that elects the accounting alternative in Topic 350 is not required to adopt the accounting alternative in Topic 805.
Additionally, the amendments make minor technical corrections to Section 350-2040, Intangibles—Goodwill and Other—Goodwill—Derecognition, updating guidance originally amended by FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions.
How Do the Amendments Improve Current Generally Accepted Accounting Principles (GAAP)?
The amendments in this Update extend the scope of the two private company alternatives to not-for-profit entities, enabling those entities to recognize fewer items as separate intangible assets in acquisitions and to account for goodwill in a more cost-effective manner.
Those amendments responded to concerns expressed by not-for-profit entities about the cost and complexity of the goodwill impairment test and the accounting for certain identifiable intangible assets, among other concerns. The amendments to the accounting alternatives in Topics 350 and 805, if elected, will reduce for preparers the cost and complexity associated with the subsequent accounting for goodwill and the accounting for certain items that currently are considered to be identifiable intangible assets for not-for-profit entities without significantly reducing relevance to users of not-for-profit financial statements.
Not-for-profit entities should apply the transition guidance in the private company accounting alternatives, which requires prospective application for new goodwill recognized, prospective amortization of existing goodwill, and prospective application for newly acquired eligible identifiable intangible assets. Not-for-profit entities should not subsume existing customer-related intangible assets and noncompete agreements into goodwill upon adoption of the accounting alternatives.
Open Effective Date
The amendments are effective upon issuance of this Update. Consistent with the existing private company alternatives for goodwill and certain intangible assets, not-for-profit entities electing to adopt these alternatives do not have to demonstrate preferability and should follow the transition guidance the first time they elect to adopt the alternatives. Not-for-profit entities have the same open-ended effective date and unconditional one-time election as private companies.