CCR Comment Letter on FASB’s Proposed Accounting Standards Update (ASU) on Topic 350, Simplifying the Accounting for Goodwill Impairment

July 20, 2016

Russell G. Golden
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Submitted via electronic mail to director@fasb.org

Re: File No. 2016-230

Dear Chairman Golden,

Financial Executives International (FEI) is a leading international organization of more than 10,000 members, including Chief Financial Officers, Controllers, Treasurers, Tax Executives and other senior-level financial executives. The Committee on Corporate Reporting (CCR) is a technical committee of FEI, which reviews and responds to research studies, statements, pronouncements, pending legislation, proposals and other documents issued by domestic and international agencies and organizations. CCR member companies represent approximately $5 trillion in market capitalization and actively monitor standard setting activities of the FASB.

This document represents the views of CCR and not necessarily the views of FEI or its members individually.

FEI’s CCR is pleased to comment on the FASB’s proposed Accounting Standards Update (ASU) on Topic 350, Simplifying the Accounting For Goodwill Impairment (“the Proposal”). We commend the Board for its efforts to simplify the accounting for goodwill.

Overall, we are supportive of the FASB’s efforts to simplify the subsequent measurement of goodwill. We believe the elimination of Step 2 of the goodwill impairment test will reduce complexity and cost overall for some. However, we believe there may be situations, for a variety of reasons, in which an entity may wish to continue to perform Step 2 of the current impairment testing model based on their specific facts and circumstances.

Therefore, we believe the Board should retain the current two step model for impairment testing, but specifically allow a “Practical Expedient” under which a company could forego Step 2 and record goodwill impairment based on Step 1. Our experience is that investors generally do not have any significant reaction to impairment charges incurred by companies. Rather, these charges are generally excluded from primary performance metrics by both companies and investors. At the same time, Step 2 of the impairment model is significantly more time consuming and costly than Step 1 without necessarily providing additional beneficial information to investors. Accordingly, added effort and cost is incurred to perform a full Step 2 analysis, but that cost and effort arguably does not produce any more decision-relevant information than Step 1 (which as noted is typically excluded from primary performance metrics). We believe the Practical Expedient approach compensates for this cost/relevance mismatch, and therefore represents a meaningful and valid simplification.

However, we also understand that there may be situations in which companies believe the added cost and effort to perform Step 2 are justified for a specific set of circumstances or reporting unit – either in order to determine a more accurate measure of impairment or in situations wherein a Step 2 valuation would reveal that goodwill may or may not be impaired due to the composition and fair value of the net tangible and identifiable intangible assets of the unit. The Practical Expedient approach would allow companies the ability to make an assessment, at the reporting unit level, whether performing Step 2 is justified based on their specific facts and circumstances.

We have also considered whether the Board could achieve the same simplification via an option that retains Step 2 as a policy election. We believe the Practical Expedient is the preferred approach. The assessment of whether to forego the practical expedient and proceed to Step 2 is very fact and circumstances driven and may be driven by differences between reporting units (i.e., due to the composition of the underlying net tangible and identifiable intangible assets) and over time (i.e., Step 2 may result in an impairment in one period and not another). Presumably, requiring companies to avail themselves of this simplification opportunity via a policy election would lock them into an approach that doesn’t make sense for all situations. 

If the Board does not agree with the Practical Expedient approach, we would support allowing companies to proceed to Step 2 via an optional policy election.  However, we believe that policy election should be made at the reporting unit level as the cost, time and complexity of performing a Step 2 valuation can vary significantly based on the nature of the underlying assets of the reporting unit.

While we believe this proposal is an important first step in simplifying the accounting model for goodwill, we encourage the Board to undertake a second phase of this project and engage in an evaluation of the “day 2” accounting for goodwill. This evaluation could include an assessment of (1) whether goodwill represents an asset or a residual value that should be classified in equity and (2) whether an amortization versus impairment approach may be more appropriate and if so, (i) over what period of time (ranging from immediate to long term) and (ii) the geography of the charge (earnings or equity) amortization. We would be happy to engage in discussions with the Board on this potential phase.

The following pages provide our responses to individual questions in the proposal.


Richard Levy
Chairman, Committee on Corporate Reporting
Financial Executives International
Cc:   Susan Cosper, FASB