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Wednesday, January 20, 2021

U.S. Accounting Standard-Setter Looks to Tackle Controversial Topics in 2021

 The U.S. accounting standard-setter plans to tackle issues around accounting for goodwill and disclosure of expenses in 2021, after a year marked by a leadership transition and the economic havoc caused by the coronavirus pandemic.

“Our agenda is filled with important items, but those are two that have drawn a lot of interest from people,” said Richard Jones, who took over as chairman of the Financial Accounting Standards Board in July. The FASB makes accounting rules for companies and nonprofit organizations in the U.S.

In recent months, the FASB has advised on how to account for the impact of the pandemic, delayed implementation of certain rules by a year and temporarily slowed its pace of standard-setting. It is now turning to other, longstanding issues that have divided companies and investors for years.

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The board, which has seven members, in 2021 wants to improve the way companies recognize the value of goodwill—a hotly debated topic in the world of accounting—and make changes to how businesses reveal certain expenses to investors.

Companies record goodwill on their balance sheets when they buy a business for more than the value of its hard assets, such as cash or factories. The acquiring business must then measure the fair value of its reporting units annually and, if that figure is less than the amount recorded on the books, reduce the value of the goodwill.

Many businesses however deem this method, which was introduced in 2001, as costly and subjective. Some investors have criticized the process because goodwill impairments often occur years after an acquisition, lagging behind market moves.

The FASB is now considering changing the process to help reduce companies’ costs, even though it doesn’t have a formal proposal yet.

It is suggesting companies should write down a set portion of goodwill each year, instead of testing annually for potential impairments. The standard-setter eliminated the former method, also called amortization of goodwill, nearly two decades ago, in part because companies said it diluted their earnings.

The FASB in December said companies should amortize goodwill with the help of a straight-line model, which means they allocate asset costs equally over their lifetime, potentially over the course of 10 years. The new process may still require companies to impair goodwill. The FASB plans to discuss in the coming quarters how an amortization model would work as its staff conducts more research and surveys companies, shareholders and other stakeholders.

Even though some investors support amortization, others, alongside analysts and academics, have criticized it because they think it doesn’t provide useful information. “Amortization is a very arbitrary annual number to put on the financial statements,” said Ray Pfeiffer, an associate accounting professor at Simmons University in Boston. “It doesn’t reflect at all the actual change in the value of goodwill.”

The FASB also plans to advance its project on segment reporting, which could require public companies to break out big-ticket expenses incurred by certain business divisions.

Companies already provide this type of information to their senior executives but don’t need to disclose it to the broader market. Investors and analysts are seeking this option because it helps them forecast revenue and margins when valuing a business. But companies often resist disclosing detailed information on the performance of their business segments for fear of revealing too much to competitors.

The FASB is set to discuss early this year how a potential new rule would define significant segment expenses. It is unlikely to finalize new standards around goodwill or segment reporting in 2021. However, it aims to unveil proposals for both by the end of 2021, Mr. Jones said.

The standard-setter recently started asking stakeholders what its priorities should be over the next several years, and expects to release this summer a paper for the public to comment on. The FASB last ran such an agenda consultation in 2016, when it added certain issues to its plans, including how to distinguish liabilities from equity. It released a standard on this in August.

Still, critics say the standard-setter isn’t moving fast enough to enact new rules. “I don’t see a lot of new innovation on the schedule for [2021],” said John Hepp, an assistant accounting professor at the University of Illinois at Urbana-Champaign.

FASB’s Mr. Jones disagrees. The FASB, he said, is pressing ahead with its agenda while taking constraints around time and resources into consideration, as companies are adapting to recent accounting changes—for example on revenue recognition, leases and expected credit losses—and managing through the pandemic’s effects. “We’re being cognizant of the environment they’re operating in,” Mr. Jones said.

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