CUNA Regulatory Comment Call
March 1, 2001
Accounting for Goodwill in Mergers
(NOT A MAJOR RULE)EXECUTIVE SUMMARY
The Financial Accounting Standards Board (FASB) has voted to eliminate the use of the pooling-of-interests method of accounting for mergers; a final rule is expected in June 2001. Under pooling, two institutions simply combine their balance sheets, avoiding a reduction in earnings. Instead, organizations now will be required to record the merger as a purchase. The purchase method requires organizations to account for goodwill - the difference between the price paid for an acquisition and the book value of the acquired assets. With the purchase method accounting, when the acquiring organization records goodwill it must amortize it, or write down its value, over a period that can last as long as 40 years. As a result, the amount of earnings shown on the income statement is reduced.
To soften the blow of the imminent rule change to the purchase method of accounting, FASB issued a limited exposure draft, proposed Statement of Financial Accounting Standards: Business Combinations and Intangible Assets - Accounting for Goodwill, containing a compromise. Under the draft proposal's "impairment only" approach, organizations would be allowed to carry goodwill on their asset sheets unless it is "impaired," or has declined in value. Organizations would be required to periodically test the value of goodwill to determine whether the goodwill is more than its fair value. The proposal lays out a number of events, such as a change in the competitive landscape or loss of key personnel, which would require the organization to re-test the goodwill to check for impairment. In the periods in which a loss of value is detected, the organization would have to take a charge against earnings equal to the difference. As a further compromise, pre-existing goodwill - that is, goodwill on the balance sheet before the issuance of the planned standards - no longer would have to be amortized.
Comments on the temporary and proposed regulations are due by March 16, 2001. Please submit your comments to CUNA by March 13, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. If you would like to submit you comments directly to FASB, the address is Financial Accounting Standards Board of the Financial Accounting Foundation, ATTN: RTA Director - File Reference 201-R, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116; to submit comments to FASB electronically, send e-mail to director@fasb.org and indicate File Reference 201-R. If you submit comments directly to FASB, please also forward a copy of your comments to CUNA. You may contact CUNA if you would like a copy of the proposed Statement or you may access it on FASB's Web site at the following address: http://rarc.rutgers.edu/fasb/rev_ed.pdf.
DESCRIPTION OF THE PROPOSED STANDARD
Click here to see a more detailed executive summary of the proposed Statement.
Goodwill
- Initially, goodwill should be recognized as an asset and measured as the excess of the fair value (current market value) over the book value of the acquired entity's net assets minus liabilities assumed at the date of acquisition.
- An acquired identifiable intangible asset should be recognized separately from goodwill if it meets the either of the following criteria:
- Control over the future economic benefits of the asset is obtained through contractual or other legal rights; or
- The asset is capable of being separated or divided and sold, transferred, rented, or exchanged.
- If the net of the amounts assigned to identifiable assets acquired and liabilities exceeds the cost of the acquired entity, that excess is often referred to as negative goodwill. Negative goodwill should be allocated on a pro rata basis to all acquired assets except cash and cash equivalents, financial instruments that are required by generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair value, and assets designated as held-for-sale. If an excess remains after that allocation is complete, that excess amount should be recognized as an extraordinary gain.
Impairment Review of Goodwill
- Goodwill should not be amortized. Instead, goodwill should be reviewed for impairment when an event or series of events occur indicating that an impairment might exist.
- Goodwill should be considered impaired and an impairment loss recognized if the fair value of the entity's goodwill is less than its book value. The amount of the impairment loss is equal to the difference between the book value and the fair value of goodwill. After an impairment loss is recognized, the adjusted book value of goodwill should be its new cost basis.
- A benchmark assessment should be performed whenever the net assets of the combined entity are substantially increased due to an acquisition and the goodwill of the entity is significant in relation to the book value of its other net assets. A benchmark assessment should be completed within one year of the date of the acquisition or at the date of the reorganization that gave rise to the benchmark assessment.
- For use in performing the benchmark assessment, the basis for and method of determining the purchase price of an acquired entity and other related factors (such as the underlying reasons for the acquisition and management's expectations related to dilution, synergies, and other financial measurements) should be documented at the acquisition date.
- Examples of events or circumstances that would require goodwill to be tested for impairment include:
- A current period operating or cash flow loss combined with a history of operating or cash flow losses of a forecast of continuing losses.
- A significant adverse change in one or more of the assumptions or expectations used in the most recent determination of fair value. Examples include:
- A product, technology, or service is introduced by a competitor that causes or is expected to cause a significant reduction in market share for a similar product, technology, or service.
- Revenue of a reporting unit has been or is expected to be significantly lower than previously expected due to changes in technology, the loss of a member or member group, increased competition, or other factors.
- A loss of key personnel has or is expected to have a significant adverse impact on ability to generate revenues or develop new products, technologies, or services as planned.
Financial Statement Presentation
- The aggregate amount of goodwill should be presented as a separate line item in the balance sheet.
- The aggregate amount of goodwill impairment losses should be presented as a separate line item in the opening section of the income statement unless a goodwill impairment loss is association with a discontinued operation.
Disclosures
- Accounting rules already require disclosure of general information about an acquisition in the period in which the business combination is completed. That information should also include the primary reason for the acquisition, including a description of the factors that contributed to a purchase price that reflects a premium that results in recognition of goodwill or a discount that results in recognition of an extraordinary gain.
- For each period for which a statement of financial position is presented, the notes to the financial statements also should disclose the changes in the book value of goodwill during the period. That disclosure should include the amount of goodwill acquired, the amount of impairment loss recognized, and the amount of goodwill included in the gain or loss on disposal of all or a portion of the entity.
- For each goodwill impairment loss recognized, the following information should be disclosed in the notes to the financial statements that include impairment loss:
- A description of the facts and circumstances leading to the impairment;
- A description of the entity for which the impairment loss is recognized, the adjusted carrying amount of goodwill, and the amount of the impairment loss; and
- If a recognized impairment loss is an estimate that has not yet been finalized, that fact and the reasons therefore, in subsequent periods, the nature and amount of any significant adjustments made to the initial estimate of the impairment loss.
Transition and Effective Date
- The elimination of the pooling method of accounting should be effective for mergers initiated after the issuance date of the Statement. Prior mergers accounted for by the pooling method should be "grandfathered."
- The provisions of this Statement should be initially applied at the beginning of the first fiscal quarter following its issuance for all entities. Earlier application is not permitted, nor is retroactive application to financial statements of prior periods.
- The provisions of this Statement should apply not only to goodwill and intangible assets arising from acquisitions completed after the issuance date of the Statement but also to goodwill and intangible assets arising from acquisitions completed before that date.
- A transitional benchmark assessment should be completed within six months of the date of adoption for an entity that includes goodwill.
- In the period of adoption of this Statement and thereafter until all periods presented reflect goodwill accounted for in accordance with this Statement, income before extraordinary items and net income computed on a pro forma basis shall be displayed for all periods presented. Goodwill impairment losses recognized in those prior periods should not be increased to reflect what the losses might have been if goodwill had not been amortized. That pro forma information may be displayed either on the face of the income statement or in the notes to the financial statements. The notes to the financial statements should disclose a reconciliation of reported earnings reflecting adjustments for amortization of goodwill and deferred credit.
QUESTIONS REGARDING THE PROPOSED STANDARD
Nonamortization of Goodwill
The revised Exposure Draft would require that goodwill not be amortized in any circumstance. The carrying amount of goodwill would be reduced only if it was found to be impaired or was associated with assets to be sold or otherwise disposed of.
- Do you agree with the Board's conclusion that goodwill is not a wasting asset if an entity is
able to maintain the value of goodwill?
Yes ________ No ________
If not, why not?
- Do you agree that requiring all goodwill not to be amortized (but to be reduced in value
when it is impaired) will result in more useful financial information than requiring goodwill
to be amortized in all circumstances or permitting goodwill to be amortized in certain
circumstances?
Yes ________ No ________
If not, which alternative would be preferable and why?
Goodwill Impairment Test
- This Statement would require that a benchmark assessment be performed whenever the net assets of an entity are changed
substantially due to an acquisition and the goodwill of that entity is significant in relation to the book value of its
other net assets. In addition, a benchmark assessment would be performed whenever an entity is significantly modified by a
reorganization of an entity's reporting structure and the goodwill of that entity is significant in relation to the carrying
amount of its other net assets. The proposed Statement would require those benchmark assessments to be completed within one
year of the date of the acquisition or at the date of the reorganization that gave rise to the benchmark assessment.
Is that time frame appropriate to perform a benchmark assessment?
Yes ________ No ________
If not, what time frame would be appropriate and why?
- This proposed Statement provides examples of events or circumstances that would require
goodwill of an entity to be tested for impairment.
Are those indicators of potential impairment appropriate?
Yes ________ No ________
If not, which of the examples should be modified and how?
Are there additional examples that should be included?
Yes ________ No ________
If so, please describe the additional examples.
- This proposed Statement would require that a goodwill impairment loss be recognized if the fair value of a reporting
unit's goodwill is less than its book value. The fair value of goodwill would be determined by subtracting fair value (with
certain exceptions) of the recognized net assets of the reporting unit excluding goodwill from the fair value of the
reporting unit. The process of determining the fair value of goodwill is similar to the process of determining the amount
of goodwill that would be recognized if the entity was purchased at its fair value but the purchase price allocation was
restricted to the net assets, other than goodwill, recognized prior to the business combination.
Do you believe that the proposed impairment test is operational and that it will adequately capture a decline in the value of goodwill?
Yes ________ No ________
If not, please explain why not and describe an operational impairment test that would adequately capture a decline in the value of goodwill.
Do you agree with the Board's conclusion that subtracting the fair value (with certain exceptions) of recognized net assets from the fair value of reporting unit results in an impairment test that strikes an appropriate balance between costs and benefits?
Yes ________ No ________
If not, what alternative would you suggest and why?
Effective Date and Transition
- The provisions in the proposed Statement would be effective for fiscal quarters beginning
after issuance of a final Statement. Neither early application nor retroactive application would be permitted. Pro forma
information would be disclosed in the period of adoption and thereafter until all periods reflect goodwill accounted for
in accordance with the proposed Statement.
Are those effective date and transition provisions appropriate?
Yes ________ No ________
If not, how should they be modified and why?
- This proposed Statement would not require that existing goodwill be tested for impairment
upon adoption of the final Statement unless an indicator of impairment exists at that date. However, this proposed
Statement would require that the benchmark assessment be performed for all existing reporting units with goodwill within
six months of adoption.
Should this proposed Statement require that all existing goodwill be tested for impairment upon adoption of the final Statement?
Yes ________ No ________
If so, what time frame should be allowed for completion of those impairment tests?
- Is six months adequate time to complete the "transitional" benchmark assessments on existing reporting units?
Yes ________ No ________
If not, why not and what time frame should be provided?
- Any other comments?
|
Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
