Is Impairment Relief Coming for M&D Companies in 2021?

Did the Financial Accounting Standards Board (FASB) end 2020 with one final COVID-19 related parting gift for certain private and not-for-profit companies with goodwill? Maybe so.

In December 2020, FASB issued an exposure draft of a proposed Accounting Standards Update (ASU) to Topic 350 Intangibles – Goodwill and Other. If issued, this ASU would provide certain private companies and not-for-profits with an accounting alternative for evaluating triggering events.

Current accounting guidance requires entities to evaluate on an ongoing basis throughout their financial statement year if a triggering event has occurred. If a triggering event is identified, an analysis must be performed in order to determine whether it is more likely than not that the fair value of a reporting unit or an entity is less than its carrying value. After the analysis, if an entity concludes that it is more likely than not that goodwill is impaired, the entity must test the goodwill for impairment. Testing for impairment is cumbersome and oftentimes costly - both in time and money - in particular for private companies that may not have the capabilities to perform such a test themselves.

The proposed guidance would permit private companies and not-for-profits that only have annual U.S. GAAP reporting requirements to evaluate triggering events and the potential need to perform an impairment test as of their reporting date only. The accounting alternative would not be available to entities that have interim GAAP reporting requirements.

This ASU could provide some much needed relief to entities which may have experienced shut downs, layoffs and other uncertainties (i.e. triggering events) in March and April 2020 as a result of the COVID-19 pandemic, but that have since fully recovered and no longer expect impairments as of year-end.

Based on responses to Citrin Cooperman’s 2020 Manufacturing and Distribution Pulse Survey Report, there were many businesses that not only recovered from the initial damage at the onset of the pandemic, but have gone on to have 2020 be their most successful year yet with more than 40% of respondents reporting growth in revenue growth and EBITDA in 2020.

It would seem only logical that what may have been a triggering event in 2020 should be left in the past for many companies. This proposed ASU allows owners and management to focus their time, money and efforts on what counts – business today and what the future may bring.

The FASB’s deadline for public comments on the exposure draft was January 20, 2021. If issued, the ASU would be effective for periods beginning after December 15, 2019, with early adoption permitted.