Private Companies: Impairing Goodwill and Indefinite-Lived Assets

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While companies hope they never have to impair an asset, it’s sometimes necessary. Whenever an asset’s fair-market value drops below the value carried on its company books, an impairment adjustment must be made. And although impairments typically occur because of external factors difficult to predict (damage, drastic market drops or obsolescence caused by rapid innovation), companies must still be quick to record and disclose the lower valuation on their financial statements. Doing so protects the integrity of the statements relied on by the company’s stakeholders and investors.

This article assesses accounting alternatives for the impairment of goodwill and indefinite-lived assets for private companies, released by the Private Company Council (PCC). These are different from the standards for public entities, recognized by the Public Company Accounting Oversight Board (PCAOB). For your reference, we have written two other articles about impairment, one providing best practices for publicly held entities, which includes shared definitions, concepts and standards. Our other article offers best practices for the impairment of long-lived assets (for both public and private companies).

PCC Accounting Alternatives for Private Companies

PCC accounting standards for impairing indefinite-lived assets may help privately held entities, as they are less stringent than those for public companies. These accounting alternatives can also help reduce the complexity of the accounting, as well as the overall cost of the assessment for private entities.

The table below summarizes the key differences between public versus private entity guidance, which we discuss in further detail following this table. Note that any company considered a public business entity is not eligible to make these PCC policy elections.

Assessment of Impairment over Goodwill

Private companies assessing impairment over goodwill can leverage the accounting options below:

• Consider Two Policy Elections: Under the PCC guidance for goodwill and impairment, a private company can make two policy elections:
  • Amortize on a Straight-Line Basis: Management can elect to amortize goodwill on a straight-line basis over a period not to exceed ten years.
    • A shorter period can be utilized so long as it can be proven that it is appropriate.
    • NOTE: This does not apply to indefinite-lived intangible assets, as these are not amortized until their life is determined to be no longer indefinite per ASC 350-30-35-4.
  • Recognize Impairment on a Triggering Event: Management can simplify the impairment testing by only recognizing impairment when a triggering event occurs. This replaces the annual impairment test as required under the general model. Additionally, management may evaluate goodwill impairment only as of the end of the designated reporting period rather than continuously over interim periods.
    • Our article Best Practices for Impairing Goodwill and Long-Lived Assets provides a deeper discussion on triggering events.
      
      
• Elect None, One or Both: Please note that a private entity can elect none, only one or both of these policies depending on its needs. Additionally, once elected, these alternatives should be applied prospectively to current goodwill/intangible-asset balances, as well as to any future goodwill/intangible asset balances that arise.
  
  
• Revert When Private Turns Public: If a privately held entity becomes a public company through means of an initial public offering (IPO), acquisition or otherwise, the entity is no longer eligible to elect these alternatives and must retrospectively revert to the existing goodwill/intangible asset model.
  
  
• Test at Reporting or Entity Level: Additionally, management has the option to test for impairment at the entity level rather than the reporting-unit level to help simplify the process. If the private entity has multiple reporting units, this will help condense and streamline the process.

Required Disclosures

Management should ensure disclosures are adequate under ASC 350 for proper transparency to financial statement users, which is required for public companies as well. When a goodwill impairment loss is recognized, the following should be disclosed:

• A description of the facts and circumstances that led to the impairment loss recorded, which includes a narrative explaining what triggered the impairment.
  
  
• The dollar value of the impairment loss and where the loss is recorded on the income statement if not obvious.
  
  
• The methodology utilized to determine fair value and whether it was performed internally or by a third-party.
  
  
• Key assumptions used in the valuation model, which includes discount rates, growth rates, terminal value assumptions and any other inputs deemed significant to the analysis.
  
  
• Identification of the specific reporting units to which the goodwill impairment applies.
  
  
• Descriptions on how the reporting units align with the segments disclosed under ASC 280, if applicable.

The only significant addition for privately held companies would be a disclosure on the adoption of the alternative, which clarifies all of the above to a reader and includes:

• Disclosure of the policy election and a description of the accounting alternative to the reader (e.g., disclosure that the impairment test is only required upon the occurrence of a triggering event).
  
  
• Statements on whether goodwill is amortized and how impairment is assessed.
  
  
• Amortization period utilized and rationale.
  
  
• Whether goodwill impairment is tested at the entity or reporting unit level.
  
  
• If impairment is recognized, the amount and method used.
  
  
• Disclosure of the prospective application.

Flexibility for Private Companies (with Important Caveats)

In summary, the PCC alternatives give private entities flexibility in their overall accounting for goodwill. By electing to amortize goodwill, adopting a triggering-event-only impairment model and optionally testing impairment at the entity level, management can significantly reduce the cost and complexity of their financial reporting without much sacrifice to the integrity of the financial statements. However, eligibility for these alternatives must be carefully assessed. Additionally, these alternatives must be disclosed properly and applied prospectively.

PKF O’Connor Davies brings the technical expertise and valuation insight needed to support your team through each step of the impairment process — from identifying risk indicators to developing robust fair value models. Our goal is to support your compliance with both the formal requirement and underlying intent of ASC 350, as well as the relevant PCC guidance, while aligning your impairment practices with your broader financial reporting objectives.

Additional Resources

This article was published along with two others that also discuss impairment of goodwill and other assets. We encourage you to reference or share as needed:

• Public Companies: Impairing Goodwill and Indefinite-Lived Assets
• Impairing Long-Lived Assets (for Public and Private Entities)

Contact Us

We welcome the opportunity to answer any questions you may have related to this topic or any other matters concerning accounting and assurance. Please contact your PKF O’Connor Davies client service team or either of the Accounting and Assurance team members and authors below:

Jonathan Zuckerman, CPA
Partner
Accounting & Assurance
jzuckerman@pkfod.com | 646.699.2842

Kenneth Sumsky, CPA, CISA
Director
Accounting & Assurance
ksumsky@pkfod.com | 332.910.7951