VRC Provides Constructive Input to the FASB on Goodwill Impairment

Valuation experts lay out shortcomings of amortization approach, recommend improvements to impairment testing approach

Valuation Research Corporation (VRC), a leading global provider of independent valuation support and advisory services, submitted a comment letter to the Financial Accounting Standards Board (the FASB) warning of fundamental weaknesses in a proposal to allow public companies to amortize goodwill and instead suggested a number of ways the current impairment testing approach could be improved and streamlined. The FASB is soliciting comments on potential changes to how goodwill—intangible assets that are reflected in a merger & acquisition context by the premium paid over the value of identified assets—is valued, periodically tested for changes in value (or “impairment”) and reflected in financial statements.

“There is broad agreement that the value of goodwill fluctuates—it can become more valuable or less so over time—so an approach that automatically devalues goodwill according to an arbitrary, linear schedule is misaligned with its economic benefits and, thus, is fundamentally flawed,” said VRC Co-CEO PJ Patel. “And it’s not just a theoretical argument,” Patel added. “The primary users of financial statements, investors in public debt and equity securities, tell us that they rely on the fair valuing of goodwill through periodic impairment tests as a useful gauge of the judgment and effectiveness of company management teams: Did they pay a reasonable price for an acquisition and have they maximized the goodwill assets that they acquired?”

VRC’s comment letter—which was informed by nearly 200 responses to a confidential survey of preparers and users of financial statements and discussions with dozens of public company officials, including CFOs, CAOs, corporate controllers, and SEC reporting directors—applauded many steps the FASB has already taken to reduce the burden of impairment testing on public companies and suggested additional steps that could relieve the burden, including testing at the business segment rather than business unit level, changing the threshold for when companies need to test, and taking steps to reduce subjective aspects of impairment testing that tend to be costly and time consuming.

The comment letter, which may be viewed on FASB.org, also cautioned against a related proposal to subsume other types of intangible assets such as non-compete agreements or certain customer-related assets into goodwill before amortizing.

“The standard setters at the FASB are conducting a thorough and deliberative process—and appropriately so since goodwill represents about $3 trillion on the balance sheets of S&P 500 companies,” said Patel. “We are grateful for the opportunity to provide our input and participate in the process going forward.”