The Financial Accounting Standards Board’s (FASB) latest actions around goodwill impairment testing for private, public, and not-for-profit entities is likely to positively impact PYA healthcare clients as they seek ways to reduce the cost and complexity of the subsequent accounting for goodwill.
ASU No. 2014-02, Intangibles – Goodwill and Other
What It Is
Instead of having to test goodwill for impairment on an annual basis, this Accounting Standards Update (ASU) permits a private company to amortize goodwill on a straight-line basis over a period of 10 years, or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment testing model for goodwill. This ASU represents a consensus of the Private Company Council (PCC) and is, therefore, applicable to non-public companies only. It is effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. However, eligible entities may adopt early and apply the alternative treatment to earlier financial statements that have not already been made available for issuance.
What Private Companies Should Do
Under this goodwill accounting alternative, goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of the company (or reporting unit) may be below its carrying amount. For a healthcare provider, an example of a relevant triggering event may be a significant increase in the level of competition, such as when a long-time sole provider of radiation therapy services suddenly sees his market share affected when a Certificate of Need is awarded to a new competing provider. Other triggering events may include (but are not limited to) loss of relationships with a third party payor, emergence of significant competition, development of medical or technological alternatives for the target market, significant micro- or macroeconomic events that adversely impact operations and loss of key physicians or a specialty group.
Healthcare providers should consider the totality of such events or circumstances, as well as other relevant facts and circumstances, to assess whether the existence of such triggering events indicates that the fair value of a reporting unit is less than its carrying amount, including goodwill. Companies will be required to make an accounting policy election to test goodwill for impairment at either the company level or the reporting unit level.
Providers should also begin considering what amortization period would be appropriate for their company’s goodwill balance, and continue to monitor for triggering events that may necessitate an interim goodwill impairment test.
Ongoing Project: Accounting for Goodwill for Public Business Entities and Not-for-Profits
For now, not-for-profit entities and public businesses must continue to assess goodwill for impairment at least annually. While the official FASB position has not changed, it is considering four accounting alternatives as part of its goodwill accounting project for public entities and not-for-profits:
Due process documents have yet to be released on this ongoing project, and FASB has deferred any further discussion until after the International Accounting Standards Board has completed and issued findings on its post-implementation review of International Financial Reporting Standard No. 3, Business Combinations. FASB is expected to continue discussion on this project later in 2014.
Ongoing Project: Private Company Accounting for Identifiable Intangible Assets in a Business Combination
Also “under construction” is the PCC’s project regarding private company accounting for identifiable, intangible assets in a business combination. One proposal in the PCC’s 2013 exposure draft would allow private companies to elect an accounting alternative to recognize separately from goodwill only those identifiable intangible assets that arise from contractual rights with non-cancelable contractual terms or that arise from other legal rights, whether or not those intangible assets are transferable or separable. Under this proposal, common healthcare provider intangible assets that would continue to be recognized separately from goodwill may include regulatory licenses, permits, or accreditation; favorable leases with non-cancelable terms; and trade names, trademarks, and internet domain names. Other intangible assets, such as patient relationships not evidenced by non-cancelable contractual terms, generally would not be recognized separately from goodwill.
At a January 2014 meeting, the PCC also discussed requiring recognition of only those intangible assets that are capable of being sold or licensed independently from other business assets. This may result in no longer recognizing certain intangible assets, such as non-compete agreements, separately from goodwill. Further, the company electing this alternative would be required to disclose, qualitatively, the nature of identifiable assets acquired, but not recognized, as a result of applying the accounting alternative.
The PCC is considering reissuing the exposure draft and summarizing any additional stakeholder feedback by the third quarter of 2014, potentially finalizing the ASU by year’s end.
PYA’s Fair Value Services
With a breadth and depth of healthcare industry expertise, PYA’s valuation team is uniquely qualified to assist both non-profit and for-profit healthcare organizations in addressing their financial reporting valuation needs. PYA’s valuation professionals are recognized as leaders in the valuation industry, and hold rigorous credentialing designations including Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), as well as state licensed Certified Public Accountant (CPA), among others.
For more information about these Accounting Standards Updates or Fair Value Services, contact the experts listed below at PYA, (800) 270-9629.