FASB Proposes Rules On NPO Goodwill And Business Combos

Nonprofits that acquire for-profit subsidiaries can let the Financial Accounting Standards Board (FASB) know the potential impact of new rules that might apply to goodwill and intangibles. The rules are four years in the making, an extension of rules applied to private companies.

FASB set a Feb. 18, 2019 deadline for comments on its proposed accounting standards update (ASU) titled “Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958) Extending the Private company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities.”

FASB issued Accounting Standards Update No. 2014-02 in 2014. The goal was simplifying accounting for goodwill and for certain identifiable intangible assets in a business combination. Those amendments were in response to concerns of private companies and their stakeholders about the cost and complexity of the goodwill impairment test and the accounting for certain identifiable intangible assets, among other concerns.

Nonprofits that will be most impacted are those that have a for-profit subsidiary, said Lee Klumpp, CPA, national assurance partner, Nonprofit & Government at BDO. He explained it’s an extension of rules addressed by FASB in 2013-2014 and put on the agenda for later study and amendment.

An example of those impacted would be a healthcare facility purchasing a forprofit practitioner practice or service, such as a laboratory or MRI business. Another example would be a nonprofit buying a building with an operating business for later expansion but running the for-profit element until the expansion is made.

The accounting element of goodwill really doesn’t help a nonprofit in communicating its financial position related to its mission activities, Klumpp explained. “The ability amortizes goodwill over 10 years and stops and valuation unless there’s a triggering event,” said Klumpp.

The ASU would permit nonprofits to annually pass up testing goodwill for impairment at the reporting unit level. They would be able to amortize goodwill over 10 years or less, on a straight-line basis, test for impairment upon a triggering event, elect to test for impairment at the entity level, and, incorporate certain customer-related intangible assets and all non-compete agreements into goodwill.

It’s also a cost-saving measure. “Performing the annual impairment test has been time consuming, costly and cumbersome for many nonprofits,” said Dennis Morrone, national partner-in-charge of Grant Thornton’s Audit Services in the Not-for-Profit and Higher Education practices. The ability for NFPs to now simply amortize goodwill under the new standard will be viewed as more expedient and cost beneficial,” he said.

Lee Klumpp

Nonprofits that will be most impacted are those that have a for-profit subsidiary. Lee Klumpp, CPA NATIONAL ASSURANCE PARTNER, NONPROFIT & GOVERNMENT at BDO

The amendments would apply to all nonprofit entities as defined in the Master Glossary of the FASB Accounting Standards Codification, including those that are conduit bond obligors. A nonprofit entity within the scope of the amendments in this proposed update that elects to apply the accounting alternative in Topic 350, Intangibles — Goodwill and Other, would be subject to all of the related subsequent measurement, derecognition, other presentation matters, and disclosure requirements of the accounting alternative, according to information in the ASU.

A nonprofit entity within the scope of the proposed amendments that elects to apply the accounting alternative in Topic 805, Business Combinations, would be subject to all of the recognition requirements of the accounting alternative. A nonprofit entity would apply the accounting alternative in Topic 805, if elected, to all transactions within the scope that are entered into after the effective date.

The amendments in the proposed update related to the accounting alternative in Topic 805 would apply when a nonprofit entity within the scope is required to recognize or otherwise consider the fair value of intangible assets as a result of any one of the following transactions (in-scope transactions):

  1. Applying the acquisition method under Topic 805 (or Subtopic 958-805, Not-for-Profit Entities — Business Combinations);

  2. Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the equity method under Topic 323, Investments — Equity Method and Joint Ventures; and,

  3. Adopting fresh-start reporting under Topic 852, Reorganizations. The amendments in the proposed update would extend the private company alternatives from Topic 350 (Update 2014-02) and Topic 805 (Update 2014-18) to nonprofit entities. Under the amendments in this proposed update to the accounting alternative in Topic 350, a nonprofit entity would amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the nonprofit entity demonstrates that a shorter useful life is more appropriate.

A nonprofit entity that elects this accounting alternative would be required to make an accounting policy decision to test goodwill for impairment at either the entity level.

For those thinking about making comments, FASB seeks responses to at least the following seven questions:

Question 1: Would the amendments in this proposed Update reduce overall costs and complexity compared with existing guidance? If not, please explain why.

Question 2: What effect would the proposed amendments have as it relates to the decision usefulness of financial reporting? For example, would the proposed amendments decrease, increase, or not affect decision usefulness? Please explain.

Question 3: Should the accounting alternatives in Topics 350 and 805 be extended to nonprofit entities? If not, which aspects of the accounting alternatives do you disagree with and why?

Question 4: What reasons would prevent a not-for profit entity from adopting the alternatives on these topics?

Question 5: Do you agree with the optionality of the accounting alternatives? If not, why should the accounting alternatives be required?

Question 6: Accounting Standards Update No. 2016-03, Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance, removes the effective date of these accounting alternatives for private companies. This was done to accommodate those companies that initially chose not to elect those alternatives because of public company exit strategies and may wish to later adopt the alternatives without having to establish preferences if their strategies subsequently change. Do nonprofit entities experience changes in circumstances that would similarly warrant an indefi- nite effective date? If so, please describe those circumstances in detail.

Question 7: FASB recently added to its technical agenda another project on these topics that, among other issues, will examine the amortization period for goodwill if the board decides to pursue amortization as an alternative for public business entities or as a requirement for the system overall. The board could decide that amendments developed as part of that project also should apply to nonprofit entities within the scope of this proposed update. It is possible that entities electing these alternatives could be subject to future changes on the same topics. Are there any reasons why the board should exclude nonprofit entities as part of that other project? If so, please explain why FASB will determine the effective date after it considers stakeholders’ feedback on the amendments in this proposed update.

To see the complete update and information on responses, go to www.fasb.org.