The U.S. accounting standard-setter plans to tackle the issues of goodwill accounting and expense disclosure in 2021, after a year marked by a leadership transition and economic devastation caused by the coronavirus pandemic.
“Our agenda is filled with important items, but these are two that have generated a lot of interest from people,” said Richard Jones, who took over as chairman of the Financial Accounting Standards Board in July. FASB sets accounting rules for businesses and nonprofits in the United States
In recent months, the FASB has provided advice on how to account for the impact of the pandemic, delayed implementation of some rules for a year, and temporarily slowed its pace of normalization. He now turns to other long-standing issues that have divided businesses and investors for years.
The seven-member board wants to improve in 2021 the way companies recognize the value of goodwill – a hotly debated topic in the accounting world – and change the way companies disclose certain expenses to investors.
Companies record goodwill on their balance sheets when they buy a business for more than the value of its enduring assets, such as cash or factories. The acquiring company must then assess the fair value of its business units annually and, if this figure is less than the amount recorded in the books, reduce the value of goodwill.
However, many companies consider this method, introduced in 2001, to be expensive and subjective. Some investors have criticized the process because goodwill impairments often occur years after an acquisition, lagging behind market movements.
The FASB is now considering changing the process to help reduce business costs, although it does not yet have a formal proposal.
He suggests that companies write down a fixed portion of goodwill each year, instead of testing for potential impairments each year. The standard-setter eliminated the old method, also known as goodwill amortization, almost two decades ago, in part because companies said it diluted profits.
The FASB said in December that companies should amortize goodwill using a straight-line model, which means they spread the costs of assets evenly over their lives, potentially over 10 years. The new process may still force businesses to harm goodwill. The FASB plans to discuss in the coming quarters how a depreciation model works as its staff do more research and surveys with companies, shareholders and other stakeholders.
While some investors are in favor of the amortization, others, alongside analysts and academics, have criticized it for believing it does not provide useful information. “Depreciation is a very arbitrary annual number to put on the financial statements,” said Ray Pfeiffer, associate professor of accounting at Simmons University in Boston. “This does not at all reflect the actual change in the value of goodwill.”
The FASB also plans to advance its segment reporting project, which may require public companies to break down the significant expenses incurred by certain business divisions.
Companies already provide this type of information to their senior executives, but do not need to disclose it to the wider market. Investors and analysts look for this option because it helps them forecast revenue and margins when valuing a business. But companies often refuse to disclose detailed information about the performance of their business segments for fear of revealing too much to their competitors.
The FASB is expected to discuss early this year how a potential new rule would define large sector spending. It is unlikely to finalize new standards for goodwill or segment reporting in 2021. However, it aims to unveil proposals for both by the end of 2021, Jones said.
The standard-setter recently started asking stakeholders what his priorities should be over the next few years, and plans to release a document this summer for the public to comment on. The FASB last held such an agenda consultation in 2016, when it added some issues to its plans, including how to distinguish liabilities from equity. He published a standard on this in August.
Yet critics say the standardizer is not moving fast enough to enact new rules. “I don’t see a lot of new innovations on the schedule for said John Hepp, assistant professor of accounting at the University of Illinois at Urbana-Champaign.
Mr. Jones of the FASB disagrees. The FASB, he said, is moving forward with its agenda while taking into account time and resource constraints, as companies adjust to recent accounting changes – for example on revenue recognition, leases and expected credit losses – and dealing with the effects of the pandemic. “We are aware of the environment in which they operate,” Mr. Jones said.
Write to Mark Maurer at [email protected]
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