Did you know that the Financial Accounting Standards Board recently extended the simplified private-company accounting alternatives to non-profit organizations? Many merging non-profits, including educational institutions and hospitals, welcome these practical expedients. Here are the details.
Alternative for goodwill
The first alternative accounting method allows for the amortization of goodwill on a straight-line basis over 10 years (or less if a shorter useful life is more appropriate). It applies only to:
- Goodwill recognized in a business combination after initial recognition and measurement
- Amounts recognized as goodwill in applying the equity method of accounting
- The excess reorganization value recognized by entities that adopt fresh-start reporting under U.S. Generally Accepted Accounting Principles for reorganizations
Once an alternative has been elected, the organization must apply all the alternative’s subsequent measurement, derecognition, presentation, and disclosure requirements to existing goodwill and all future additions to goodwill that fall within the scope of the accounting alternative.
Upon adoption of the accounting alternative, the organization must decide whether to test goodwill at either the entity level or the reporting unit level. However, annual impairment testing is not required under the alternative. Rather, testing for impairment is required only if a triggering event occurs that indicates that the fair value of the non-profit entity (or the reporting unit) may be below its carrying amount.
Alternative for identifiable intangible assets
The second accounting alternative allows a non-profit organization to bypass the separate recognition of noncompete agreements and customer-related intangible assets unless they can be sold or licensed independently from other assets of a business. In other words, such items would be considered part of goodwill. Non-profits that elect this alternative would recognize fewer intangible assets in a business combination.
It applies to non-profit organizations that are required to recognize or consider fair value of intangible assets when:
- Applying the acquisition method for a business combination
- Evaluating the nature of a difference between an investment’s carrying amount and the underlying equity in the net asset of an investee when applying the equity method of accounting
- Adopting fresh start accounting for reorganizations
If an organization decides to elect the accounting alternative for accounting for identifiable intangible assets, it also must adopt the accounting alternative for goodwill. However, a non-profit that elects to adopt the accounting alternative for goodwill is not required to adopt the accounting alternative for accounting for identifiable intangible assets.
Effective date & transition
Non-profits can immediately elect to use these alternative reporting methods. If elected, the goodwill accounting alternative should be applied prospectively to all existing goodwill and for all new goodwill generated in acquisitions. And the alternative for accounting for identifiable intangible assets should be applied prospectively upon the occurrence of the first transaction within the scope of the alternative. Contact us for more information. Our accounting professionals can help determine if these alternatives are right for your organization.