ASC 350-35: A Goodwill Accounting Alternative
ASC 350-35 offers a practical accounting alternative for goodwill, allowing certain entities to use amortization to simplify impairment testing requirements.
When one company acquires another, it often pays a price higher than the value of the individual assets and liabilities being purchased. This premium is an intangible asset called goodwill, representing factors like brand reputation, customer relationships, and other unidentifiable benefits. To reduce the cost and complexity of goodwill accounting, the Financial Accounting Standards Board (FASB) created a simplified approach under Accounting Standards Codification (ASC) Topic 350-20, Intangibles—Goodwill and Other. This guidance provides an accounting alternative for certain types of entities.
Scope and Eligibility for the Accounting Alternative
The option to simplify goodwill accounting is limited to private companies and not-for-profit entities. Publicly traded companies, which are subject to Securities and Exchange Commission (SEC) regulations, must follow the standard, more rigorous goodwill accounting rules. The simplified method is an accounting policy election, meaning eligible entities must affirmatively choose to adopt it.
The chosen accounting method must be applied to all goodwill on the entity’s balance sheet at the date of adoption. This includes goodwill from past acquisitions as well as any new goodwill recognized in business combinations that occur after the election is made. This requirement ensures consistency in how goodwill is accounted for from the point of adoption forward.
The Amortization and Impairment Model
The accounting alternative uses a two-part model for how goodwill is treated after it is recorded. First, entities amortize their goodwill on a straight-line basis over a period of 10 years. However, if an entity can demonstrate that a shorter useful life is more appropriate, it may use that shorter period. This amortization is recorded as a periodic, non-cash expense on the income statement.
The second part is a simplified approach to impairment testing. Instead of the annual test required for public companies, entities using this alternative test for impairment only when a triggering event indicates that the fair value of the entity may have fallen below its carrying amount. Another provision allows entities to perform this assessment only at the end of an interim or annual reporting period.
Examples of triggering events include a significant adverse change in the business climate, an unanticipated increase in competition, or the loss of key personnel. If a triggering event is identified, the entity must perform an impairment test to determine if the recorded value of goodwill is overstated. Any impairment loss recognized cannot exceed the goodwill’s carrying amount.
Making the Election and Disclosure Requirements
An entity makes the election by documenting it as an official accounting policy and then applying the new method in its financial statements for the period of adoption. The change is applied prospectively, meaning it affects the current and future periods but does not require the restatement of prior financial statements.
Following the election, an entity must provide specific disclosures in the footnotes to its financial statements. The entity must clearly state that it has elected the accounting alternative for goodwill. It is also required to disclose the amortization period being used, which is typically 10 years.
The financial statement footnotes must also present the total amount of goodwill amortization expense recognized for the period. This allows readers to see the impact of the non-cash expense on the entity’s net income. Finally, the disclosures must include the carrying amount of goodwill on the balance sheet.