Standards Update: 5/11/21
The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below are select ASUs that were recently issued.
- ASU No. 2021-03, Intangibles–Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
- ASU No. 2021-04, Earnings Per Share (Topic 260), Debt–Modifications and Extinguishments (Subtopic 470-50), Compensation–Stock Compensation (Topic 718), and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)
ASU No. 2021-03, Intangibles‒Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
The FASB has issued ASU No. 2021-03, Intangibles‒Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events to provide private companies and not-for-profit entities with relief in evaluating goodwill for impairment.
Summary
Currently under GAAP, there are three models related to subsequent accounting for goodwill:
- A traditional model without amortization requiring a two-step approach to calculating impairment
- A traditional model without amortization requiring only a one-step approach to calculating impairment
- A model available to private companies and not-for-profit entities that provides for goodwill amortization and a one-step approach to calculating impairment.
All three models require management to continually monitor for goodwill impairment triggering events throughout a reporting period. A triggering event is deemed to have occurred if there are events and circumstances that indicate that the fair value of a reporting unit (or an entity, if this option is selected under the amortization model) is less than its carrying amount. Also, for all three models, once a goodwill impairment is recognized, it cannot be reversed.
Under current guidance, continually monitoring for goodwill impairment triggering events is required regardless of whether the entity reports on an interim basis or only on an annual basis, though many private companies believed that goodwill was only required to be evaluated for triggering events at year-end. This continual monitoring process increases the complexity of subsequent accounting for goodwill, and many stakeholders have expressed that it does not provide a corresponding increase in benefit. The analysis became even more difficult when considering the impact of the COVID pandemic, including determining if there was a triggering event as well as the date of the triggering event. Furthermore, an entity could not bypass testing goodwill for impairment if there was a COVID-related triggering event when it was clear circumstances had improved later in the year.
ASU No. 2021-03 provides relief to private companies and not-for-profit entities, regardless of the model used for subsequent accounting for goodwill. The ASU provides an accounting alternative to perform the goodwill impairment triggering event evaluation only as of the end of the reporting period. Once elected, an entity is no longer to continually monitor for goodwill impairment triggering events. If an entity provides interim U.S. GAAP-compliant financial information, the evaluation would be performed for each interim reporting period. If an entity only provides annual financial information, the evaluation would only be performed at year-end.
The alternative may only be applied to goodwill. The ASU explicitly prohibits applying the alternative to other intangibles and long-lived assets.
Effective Date and Transition
ASU No. 2021-03 is effective on a prospective basis for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. The amendments may be initially applied without performing a preferability assessment under ASC 250, Accounting Changes and Error Corrections and will be available on an ongoing basis, not limited to reporting periods impacted by the COVID pandemic.
ASU No. 2021-04, Earnings Per Share (Topic 260), Debt‒Modifications and Extinguishments (Subtopic 470-50), Compensation‒Stock Compensation (Topic 718), and Derivatives and Hedging‒Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)
The FASB has issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt‒Modifications and Extinguishments (Subtopic 470-50), Compensation‒Stock Compensation (Topic 718), and Derivatives and Hedging‒Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) to reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options by issuers.
Summary
Currently, U.S. GAAP does not provide explicit guidance for the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified leading to diversity in accounting by issuers, particularly as to whether the modification or exchange results in an adjustment to equity or an expense.
ASU No. 2021-04 includes guidance for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified and is not within the scope of another Accounting Standards Codification topic, as follows:
- An entity should treat the modification or exchange as an exchange of the original instrument for a new instrument.
- An entity should measure the effect of the modification or exchange as follows:
- For a modification or an exchange that is a part of or directly related to a modification or an exchange of an existing debt instrument or line-of-credit or revolving-debt arrangement, as the difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately before it is modified or exchanged.
- For all other modifications or exchanges, as the excess, if any, of the fair value of the modified or exchanged written call option over the fair value of that written call option immediately before it is modified or exchanged.
- An entity should recognize the effect of the modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration, as follows:
- A financing transaction to raise equity. The effect should be recognized as an equity issuance cost in accordance with ASC 340, Other Assets and Deferred Costs.
- A financing transaction to raise or modify debt. The effect should be recognized as a cost in accordance with ASC 470, Debt, and ASC 835, Interest.
- Other modifications or exchanges that are not related to financings or compensation for goods or services or other exchange transactions within the scope of another ASC topic. The effect should be recognized as a dividend.
An entity should recognize the effect of the modification or exchange to compensate for goods or services in accordance with the guidance in ASC 718, Compensation‒Stock Compensation.
In a multiple-element transaction (i.e., one including both debt and equity financing), the total effect of the modification should be allocated to the respective elements in the transaction.
Effective Date and Transition
ASU No. 2021-04 is effective for all entities for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. The ASU should be applied prospectively to modifications or exchanges occurring on or after the effective date of the ASU. Early adoption is permitted, including in an interim period. If adopted in an interim period, the amendments should be applied as of the beginning of the fiscal year including the interim period.
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