January 2001

FASB Says No More Amortization of Goodwill

At a public meeting on Dec. 6, the Financial Accounting Standards Board (FASB) announced a tentative decision to modify certain provisions of its Sept. 1999 proposed statement on business combinations and intangible assets, to require use of a nonamortization approach to account for purchased goodwill.

Under the new approach, goodwill would not be amortized to earnings (i.e., expensed against earnings annually over a period of up to 20 years). Instead, goodwill would be reviewed for impairment only in the periods in which the recorded value of goodwill is more than its fair value.

“Determining the appropriate accounting treatment for purchased goodwill has been the most challenging issue in our project to improve the transparency of accounting for business combinations,” said FASB Chair Edmund L. Jenkins.

According to the tentative recommendations of FASB, which is the designated organization for establishing standards for financial accounting and reporting in the private sector, all goodwill would be accounted for by using an impairment approach from the date of issuance. Under the new approach, goodwill would be reviewed for impairment (i.e., written down and expensed against earnings) only in the periods in which the recorded value of goodwill is more than its fair value.

An initial impairment review would be performed on goodwill of the reporting unit if the amount of goodwill were significant to that unit. Subsequent impairment reviews would only be required upon the occurrence of events indicating that the goodwill of the reporting unit might be impaired.

FASB also announced on Dec. 20 that goodwill recorded on corporate balance sheets, arising from acquisitions completed prior to the date the Board issues its final statement on business combinations, would no longer be amortized.

The FASB decision resulted from feedback from companies, auditors, investors, and other entities, said Jenkins. The feedback included the results of field visits to companies last year and indicated that an impairment approach for goodwill could be developed that would be operational.

The Board issued this decision on an impairment-only approach for public comment. The Board plans to issue a revised limited exposure draft for a 30-day comment period sometime in the first quarter of 2001.

Currently, the Board is addressing the issue of whether to retain the pooling-of-interests method of accounting for business combinations and related issues.

The Board says it plans to issue a final statement that will encompass its decisions on the pooling method and the accounting for goodwill and other purchased intangible assets in the second quarter of 2001.

Details on each of the tentative decisions are available on the FASB website at www.fasb.org.