Effective Date
The ASU’s accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.
Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.
Transition Rules
Goodwill existing as of the beginning of the period of adoption shall be amortized prospectively on a straight-line basis over 10 years, or less than 10 years if an entity demonstrates that another useful life is more appropriate.
Upon adoption of the accounting alternative, an entity shall make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.
¶ 809 DISCLOSURES
The ASU eliminated several of the current goodwill disclosures if a nonpublic entity elects to amortize goodwill. Following are the new disclosures that apply for a nonpublic entity that elects to amortize goodwill under ASU 2014-02.
Additions to Goodwill
The following information shall be disclosed in the notes to financial statements for any additions to goodwill in each period for which a statement of financial position is presented:
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TOP ACCOUNTING ISSUES FOR 2015 CPE COURSE• The amount assigned to goodwill in total and by a major business combination or by a reorganization event resulting in fresh-start reporting
• The weighted-average amortization period in total and the amortization period by major business combination or by reorganization event resulting in fresh-start reporting
Each Period for Which a Statement of Financial Position is Presented
The following information shall be disclosed in the financial statements, or the notes to financial statements, for each period for which a statement of financial position is presented:
• The gross carrying amounts of goodwill, accumulated amortization, and accu-mulated impairment loss
• The aggregate amortization expense for the period
• Goodwill included in a disposal group classified as held for sale in accordance with ASC 360, Property, Plant and Equipment, and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale.
Goodwill Impairment Loss
For each goodwill impairment loss recognized, the following information shall be disclosed in the notes to financial statements that include the period in which the impairment loss is recognized:
• A description of the facts and circumstances leading to the impairment
• The amount of the impairment loss and the method of determining the fair value of the entity or the reporting unit (whether based on prices of comparable businesses, a present value or other valuation technique, or a combination of those methods)
• The caption in the income statement in which the impairment loss is included
• The method of allocating the impairment loss to the individual amortizable units of goodwill
NOTE: The quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by ASC 820, are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination.
COMPARISON-ABBREVIATED DISCLOSURES UNDER ASU 2014-02 VERSUS FULL DISCLOSURES UNDER GAAP
Full Disclosures of Goodwill Under GAAP Abbreviated Disclosures for Nonpublic (Full disclosures apply to all public entities and Entities Electing to Amortize Goodwill those nonpublic entities that do not elect to (Accounting Alternative- ASU 2014-02) amortize goodwill under ASU 2014-02.)
DISCLOSURE 1: DISCLOSURE 1:
Information for each period for which a statement Information for each period for which a statement of financial position is presented: of financial position is presented:
Tabular disclosure of changes in the carrying ELIMINATED amount of goodwill during the period, showing
separately:
Gross amount and accumulated impairment losses at beginning of period
COMPARISON-ABBREVIATED DISCLOSURES UNDER ASU 2014-02 VERSUS FULL DISCLOSURES UNDER GAAP
Additional goodwill recognized during the period Adjustments resulting from subsequent recognition of deferred tax assets during the period
Goodwill included in a disposal group classified as Goodwill included in a disposal group classified as held for sale and goodwill derecognized during the held for sale and goodwill derecognized during the period without having previously been reported in period without having previously been reported in a disposal group classified as held for sale a disposal group classified as held for sale.
Impairment losses recognized during the period Net exchange differences arising during the period
Any other changes in the carrying amounts during the period
Gross amount and accumulated impairment losses Gross carrying amounts of goodwill, accumulated at the end of the period amortization, and accumulated impairment loss at
the end of the period
The aggregate amortization expense for the period
Full Disclosures of Goodwill Under GAAP Abbreviated Disclosures for Nonpublic (Full disclosures apply to all public entities and Entities Electing to Amortize Goodwill those nonpublic entities that do not elect to (Accounting Alternative- ASU 2014-02) amortize goodwill under ASU 2014-02.)
DISCLOSURE 2: DISCLOSURE 2:
For each goodwill impairment loss recognized: For each goodwill impairment loss recognized:
A description of the facts and circumstances A description of the facts and circumstances leading to the impairment leading to the impairment
The amount of the impairment loss and the The amount of the impairment loss and the method of determining the fair value of the method of determining the fair value of the entity associated reporting unit or the reporting unit
If a recognized impairment loss is an estimate that has not yet been finalized, that fact and the reasons therefore and, in subsequent periods, the nature and amount of any significant adjustments made to the initial estimate of the impairment loss
The caption in the income statement in which the impairment loss is included
The method of allocating the impairment loss to the individual amortizable units of goodwill
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TOP ACCOUNTING ISSUES FOR 2015 CPE COURSEDISCLOSURE 3: DISCLOSURE 3:
None Disclosures about additions to goodwill:
The following information shall be disclosed in the notes to financial statements for any additions to goodwill in each period for which a statement of financial position is presented:
• The amount assigned to goodwill in total and by major business combination or by reorganization event resulting in fresh-start reporting
• The weighted-average amortization period in total and the amortization period by major business combination or by reorganization event resulting in fresh-start reporting
Full Disclosures of Goodwill Under GAAP Abbreviated Disclosures for Nonpublic (Full disclosures apply to all public entities and Entities Electing to Amortize Goodwill those nonpublic entities that do not elect to (Accounting Alternative- ASU 2014-02) amortize goodwill under ASU 2014-02.)
DISCLOSURE 4: DISCLOSURE 4:
None Disclosure of an entity’s accounting policy election
to test goodwill for impairment at the entity level or the reporting unit level
DISCLOSURE EXCLUSION: DISCLOSURE EXCLUSION:
The quantitative disclosures about significant The quantitative disclosures about significant unobservable inputs used in fair value unobservable inputs used in fair value
measurements categorized within Level 3 of the measurements categorized within Level 3 of the fair value hierarchy are not required for fair value fair value hierarchy are not required for fair value measurements related to the financial accounting measurements related to the financial accounting and reporting for goodwill after its initial and reporting for goodwill after its initial recognition in a business combination. recognition in a business combination.
OBSERVATION: In modifying the disclosures required for nonpublic entities that elect to amortize goodwill, the PCC decided that for amortizable goodwill, disclosures in the period of acquisition should be similar to disclosures for other finite-lived intangible assets for which an entity would disclose, for example, the weighted-average useful life of the asset.
The ASU does not carry forward the existing requirement in ASC 350 to include a tabular reconciliation of the beginning balance, ending balance, and activity (major additions and subtractions) in the goodwill balance from period to period. The tabular reconciliation was eliminated based on comment letter feedback and consideration of the Private Company Decision-Making Framework, which indicates that the PCC and the FASB generally should consider excluding tabular reconciliations from the disclosure requirements. The PCC concluded that information about changes in goodwill could be important to users (e.g., knowing the amount of amortization expense so that it can be added back to net income) but that it is not necessary to include that information in a tabular reconciliation. Further, some elements of the tabular reconciliation can be found elsewhere in the notes to the financial statements. For example, the amount of new goodwill is included as a part of the business combination note. When there is a goodwill impairment loss, the disclosure requirements in ASC 350 continue to apply, except for those disclosures related to step two of the test and those related to reporting units (if the option to test at the entity level is elected).
STUDY QUESTION
3. ASU 2014-02 eliminates which disclosure for private companies electing to amortize goodwill?
a. Tabular reconciliation
b. Aggregate amortization expense for the period
c. Gross carrying amounts of goodwill at the end of the period d. Accumulated amortization at the end of the period
¶ 810 EXAMPLE: GOODWILL DISCLOSURES—ASU 2014-02
Facts: On January 1, 20X2, Company A, a non-public entity, acquired 100% of the assets Company B for $10 million.
At December 31, 20X2, the financial statements of Company A and B look like this:
Company A Balance Sheet December 31, 20X2 ($000s)
Current assets: Current liabilities:
Cash $xx Accounts payable $xx
Accounts receivable xx Accrued expenses xx
Inventory xx Current portion of debt xx
Other current assets xx Other current liabilities xx
Total current assets xx Total current liabilities xx
Property, plant and xx Long-term debt xx
equipment, net
Goodwill 2,700 Stockholder’s equity xx
Other intangibles assets, net 8,000
Total assets $xx Total liabilities and equity $xx
Company A elects to amortize goodwill over 10 years as authorized by ASU 2014-02.
The following disclosures are required by ASC 350 and 805, as amended by ASU 2014-02.
Disclosures in 20X2:
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Goodwill and Other Intangible Assets:
Intangible assets include patents, customer lists, licenses and trademarks related to certain acquisitions.
Intangible assets are amortized over the following estimated useful lives using primarily straight-line basis.
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TOP ACCOUNTING ISSUES FOR 2015 CPE COURSEIntangible asset Life in years
Patents 7
Customer list 5
Licenses and certain trademarks acquired are not amortized as they are considered to have indefinite useful lives.
The excess of the purchase price over the fair value of identifiable tangible and intangible assets is allocated to goodwill. For year 20X1, goodwill is not amortized and is tested for impairment annually.
In accordance with Accounting Standards Update (ASU) 2014-02— Intangibles—
Goodwill and Other (Topic 350): Accounting for Goodwill, effective in 20X2, the Com-pany elected to amortize goodwill on a straight-line basis over 10 years. Begin-ning in 20X2, goodwill is tested for impairment at the entity level only when an event occurs or circumstances change that indicate that the fair value of the entity may be less than its carrying amount. Impairment losses, if any, are recorded in the statement of income as part of income from operations. No impairment losses were measured and recorded in 20X2 and 20X1.
NOTE 2: ACQUISITIONS
(Required in the year in which a material business combination is completed) On January 1, 20X2, Company A acquired the net assets of Company B. The results of Company B’s operations have been included in Company A’s financial statements since the acquisition date, January 1 to December 31, 20X2.
Company B is a leading provider of data networking products and services in 18 states and Canada, and was acquired because it would provide Company A with the leader position in B’s markets and result in reduced costs of both companies through economies of scale.
The aggregate acquisition cost was $10 million, consisting of $6 million of cash, and
$4 million of acquisition financing.
The fair value of the assets acquired at the date of acquisition is summarized below:
Fair value
Inventory $2,800
Property and equipment 2,200
Identifiable intangible assets 2,000
3,000 Goodwill
$10,000 Total assets acquired
At the date of acquisition, the identified intangible assets and goodwill included the following:
Fair value Weighted-average ($000s) amortization period Intangible assets subject to amortization:
Patents $ 400 7 years
700 5 years
Customer list
1,100
Total 5.6 years
Intangible assets not subject to amortization:
Trademarks 900 Indefinite
$2,000 Total identifiable intangible assets
$3,000
Goodwill 10 years
Significant elements of goodwill include the expected synergies between Company A and B (related to economies of scale and process improvements), competitive advan-tage, and distribution channels that will provide a market reach in both communications and networking.
The amount of goodwill that is expected to be deductible for income tax purposes is $3,000.
NOTE 3: GOODWILL AND OTHER INTANGIBLE ASSETS
(This note is shown for each year for which there is a balance sheet):
Intangible assets other than goodwill:
The following is a summary of goodwill and other intangible assets at December 31, 20X2 and 20X1.
December 31, 20X2 December 31, 20X1
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
Intangible assets subject to amortization:
Patents $2,500 $1,200 $2,100 $800
2,600 1,400 1,900 1,000
Customer lists
5,100 2,600 4,000 1,800
Intangible assets not subject to amortization:
Licenses 3,000 0 3,000 0
2,500 0 1,600 0
Trademarks
5,500 0 4,600 0
3,000 300 0 0
Goodwill
$13,600 $2,900 $8,600 $1,800
Amortization expense was $1,100 in 20X2 and $500 in 20X1.
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TOP ACCOUNTING ISSUES FOR 2015 CPE COURSEA summary of estimated amortization expense for the five years subsequent to 20X2 follows:
Year Amortization expense
20X3 $1,200
20X4 1,200
20X5 1,200
20X6 1,200
20X7 1,200
-end of
disclosure-OBSERVATION: Note 2 related to acquisitions would be eliminated alto-gether in years subsequent to the acquisition unless the acquisition year is presented comparatively.