Private companies have two accounting alternatives for goodwill that public companies do not. The first, from ASU 2014-02, lets a private company amortize goodwill. The second, from ASU 2021-03, lets a private company or not-for-profit evaluate goodwill triggering events only at the end of each reporting period. They are separate elections. This guide explains each, shows the entries and lists what the auditor checks. For the standard test used by entities that do not amortize, see the qualitative assessment and one-step test. For acquisition accounting, see ASC 805 for private companies.
What does the ASU 2014-02 alternative allow?
A private company may amortize goodwill on a straight-line basis over 10 years, or over a shorter period if another useful life is more appropriate. ASC 350-20-35-63, as amended by ASU 2021-03, sets the straight-line 10-year rule, or less than 10 years if the entity demonstrates another useful life is more appropriate. Baker Tilly describes the same alternative: a private company can amortize goodwill straight-line over up to 10 years and test for impairment only when a triggering event occurs.
An entity that elects amortization also chooses, as an accounting policy, whether to test goodwill at the entity level or at the reporting unit level. ASC 350-20-35-65 requires that election on adoption.
What does the ASU 2021-03 alternative allow?
A private company or not-for-profit may make an accounting policy election to evaluate goodwill triggering events as of the end of each reporting period, interim or annual, instead of monitoring for them throughout the period. RubinBrown's summary says the update no longer requires private companies to monitor triggering events during the fiscal year, and that the entity evaluates the facts and circumstances as of the end of the reporting period. ASC 350-20-15-4A sets the eligibility, and the alternative applies only to goodwill accounted for under ASC 350-20, not equity method goodwill.
Are the two alternatives linked?
No. Under ASC 350-20-15-6, an entity electing one alternative is not required to elect the other and is not precluded from electing it. An entity that has also elected amortization evaluates triggers only at reporting dates under the new alternative. An entity that has not elected amortization and runs its annual test at the end of the reporting period does not evaluate goodwill for impairment during the period. If its annual test falls on another date, it evaluates between tests only as of the end of a reporting period.
When does ASU 2021-03 apply, and how is it adopted?
ASU 2021-03 is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim and annual financial statements not yet issued or made available for issuance as of March 30, 2021. The alternative cannot be applied retrospectively to interim statements already issued in the year of adoption. Adoption after the effective date is an unconditional one-time option, and the entity need not assess preferability under ASC 250. RubinBrown describes the same one-time transition election.
An entity that elects it must disclose its use of the alternative as a significant accounting policy (ASC 350-20-50-3B).
How does this relate to the standard test?
Baker Tilly explains that ASU 2017-04, which removed the second step of the impairment test, applies to private companies that have not elected amortization, and that public companies cannot amortize goodwill. A private company therefore sits in one of two positions: amortizing and testing only when a triggering event occurs, or not amortizing and following the standard annual and interim testing model. The ASU 2021-03 election layers on top of either position.
Worked entries
Illustration only, with round numbers. A private company acquires a business and records $1,500,000 of goodwill. It elects the ASU 2014-02 alternative and amortizes over 10 years.
| Account | Debit | Credit |
|---|---|---|
| Goodwill amortization expense | $150,000 | |
| Goodwill (or accumulated amortization) | $150,000 |
That entry repeats each year. After three years, goodwill is $1,050,000.
A shorter life changes the arithmetic. Over 7 years, annual amortization is $214,286, and the balance after three years is $857,143.
If a triggering event occurs and the test shows the carrying amount exceeds fair value, the impairment is recorded as a charge against goodwill, in addition to the amortization already taken. The detailed measurement mechanics for amortizing entities are in the codification and are not reproduced here.
Audit angle
The alternatives reduce effort for management, which moves the auditor's attention from the test itself to the election, the schedule and the year-end memo.
- Election and disclosure. Obtain evidence of the election: who approved it, when and which one. Agree the policy note to the election and check that it is described as a significant accounting policy.
- Eligibility. The ASU 2021-03 alternative is limited to private companies and not-for-profit entities. Check that the entity qualifies, and that nothing about its reporting (a planned SEC filing, a change in ownership structure) has changed that status.
- Amortization. Recompute amortization from the acquisition date: balance, period (10 years or shorter) and the start date.
- Triggering events. If the entity elected the end-of-period evaluation, inspect the year-end memo. Compare against board minutes, covenant status, customer losses and budget results.
- Test level. Check that the policy (entity or reporting unit) is applied the same way each year.
- Impairment test. If a trigger exists, evaluate the fair value measurement and the carrying amount as in fair value measurement and auditing accounting estimates.
Common misstatements: amortization continued past the life, an election applied without a documented decision, a year-end memo that is boilerplate, and use of the alternatives by an entity that does not qualify.
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Sources
- FASB, ASU 2021-03, Accounting Alternative for Evaluating Triggering Events (effective date, ASC 350-20 paragraphs 15-4A, 15-6, 35-63, 35-65, 50-3B, transition): https://storage.fasb.org/ASU%202021-03.pdf
- RubinBrown, FASB issues alternative to goodwill triggering event assessment: https://rubinbrown.com/accounting-audit-alerts/fasb-issues-alternative-to-goodwill-triggering-event-assessment
- Baker Tilly, The test for goodwill impairment gets easier: https://www.bakertilly.com/insights/the-test-for-goodwill-impairment-gets-easier
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