FASB Reaches Tentative Decision on Accounting for Purchased Goodwill

Norwalk, CT, December 6, 2000—At today's public meeting the Financial Accounting Standards Board (FASB) reached a tentative decision to modify certain provisions of its September 1999 proposed Statement, Business Combinations and Intangible Assets, to require use of a nonamortization approach to account for purchased goodwill. Under that approach, goodwill would not be amortized to earnings, in other words, expensed against earnings annually over a period of up to 20 years, as originally proposed. Instead it would be reviewed for impairment, that is, written down and expensed against earnings only in the periods in which the recorded value of goodwill is more than its fair value.

"Determining the appropriate accounting treatment for purchased goodwill has been the most challenging issue in our project to improve the transparency of accounting for business combinations," said FASB Chairman Edmund L. Jenkins. "Today's tentative decision to modify the proposed Statement's treatment of goodwill is directly responsive to the feedback we received on this issue from many companies, auditors, investors, and others. That feedback, including the results of recent company field visits, indicated that an impairment approach for goodwill could be developed that would be operational. The input also confirmed that such an approach would be an improvement over the originally proposed amortization approach because it provides investors with greater transparency with respect to the economic value of goodwill and the amount and timing of its impact on companies' earnings. The approach is also consistent with the Board's conclusion, contained in the proposed Statement, that some of what is recorded as a goodwill asset does not decrease in value."

Under the nonamortization approach tentatively agreed upon, goodwill would be reviewed for impairment at the lowest reporting level or levels that include the acquired business (the reporting unit). A company would be required to determine the value of that reporting unit or units and the value of the recognized net assets (excluding goodwill) of the same unit or units. The difference between those amounts-the implied value of goodwill-would be compared with the carrying amount of goodwill related to that unit or units. If that implied value of goodwill is less than the carrying amount of goodwill, an impairment loss would be recorded in the company's income statement.

An initial impairment review would be performed on goodwill of the reporting unit if the amount of goodwill were significant to that unit. Subsequent impairment reviews would only be required upon the occurrence of events indicating that goodwill of the reporting unit might be impaired.

Further details and implications of the impairment approach will be discussed at future public Board meetings. After discussion of those issues the Board will redeliberate the related issue of whether to retain the pooling-of-interests method. The Board also expects to discuss the issue of whether some limited reexposure of the impairment approach for public comment is necessary.

The Board will not make any final decisions or consider whether to issue a final standard until it has addressed all of the substantive issues raised by constituents and has considered the entire set of tentative decisions reached during its redeliberations, which began in April 2000. A summary of those tentative decisions is available on the Board's Web site under Exposure Drafts.

The Board has no "deadline" for completing the project. In the Board's most recent quarterly review of all FASB projects, the Board estimated that it would not be able to complete the project on business combinations and intangible assets any earlier than late in the first quarter of 2001. That estimate could be extended further depending upon the progress of the Board's redeliberations.