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The Financial Accounting Standards Board (FASB) recently endorsed a GAAP exception for private companies and their treatment of goodwill, marking a milestone in the work to provide simpler, less costly rules for private companies while producing financial statements that reflect economic reality.

The exception will exempt (with the exception of a triggering event) private companies from having to perform impairment tests for goodwill subsequent to a business combination. The exception gives private companies the option to amortize goodwill over ten years or less than ten years if the company can demonstrate that another useful life is more appropriate. Under the exception, a private company will be able to make an accounting policy decision to perform its impairment testing at the entity level or the operating level.

Prior to this exception by the FASB, a private company would test goodwill for impairment only when a triggering event occurs that may reduce the fair value of an entity or reporting unit (if elected) below its carrying amount. The exception would also eliminate Step 2 of the impairment test.

It is expected that the final standard, once issued, will be applied prospectively for goodwill existing as of the beginning of the period of adoption, and for goodwill generated from business combinations occurring in the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. Goodwill that exists at the beginning of the period of adoption can be amortized prospectively over ten years or less than ten years if another useful life is more appropriate. Early adoption is permitted.

It should be noted that larger private companies may face a difficult decision. If they have any desire to go public, they may decline to use the exception because it would be challenging to go back and reconfigure their historical accounting at a later date.

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