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A New Direction for Goodwill

A recently released alternative for goodwill accounting could save private companies money and time.

Exline acknowledges that there are a number of differences between IRS regulations and GAAP standards, and small firms can usually hire an external CPA to make adjustments for GAAP. But the more differences there are, the harder that becomes, he says.

At the same time, Exline is talking about very small companies. Most firms with a CFO will easily be able to account for the different amortization schedules. Exline also says he supports the new standard overall, because it will make the lives of small company finance teams easier, he says.

The Considerations
Companies that consider adopting the alternative should spend time mulling their options, says Kirsten Schofield. “If I were a CFO of a company, I would be thinking about what is the cost to my organization of applying the existing standard versus the alternative and I would also be thinking about the users of my financial statements, my constituents,” she says. “How does this impact them, what information is important to them?” For instance, companies should consider whether switching to the new accounting alternative will create any debt- covenant compliance problems, she says.

Private companies should also keep in mind that if they adopt the alternative standard and meet the definition of a public business entity in the future (if they’re acquired or go public, for instance), they would have to “unwind” their earlier accounting. That means a firm would have to go back and “retrospectively apply [the existing standard] for the years that it used the alternative [standard] in the financial statements being presented,” Schofield says.

“If you’re a private company and you think you’re going to go through an IPO in the near-term, you would really want to think about whether or not this was the right solution for you,” she says. “Some companies might say ‘that’s okay, I’ll deal with this when the time comes.’ Others might say it’s easier to stay under the existing rules.”

The FASB will issue another alternative in January related to certain interest rate swaps. Companies can choose to adopt the alternatives on a standard-by-standard basis.

2 thoughts on “A New Direction for Goodwill

  1. Interesting idea; however, don’t see it being applied much. Amortizing the goodwill will result in lower GAAP net income and reduce key ratios. Not something investors tend to like.

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