While the FASB provided private companies and NFPs with the option of adopting a simplified goodwill accounting model, before electing any of the accounting alternatives, a private entity should consider whether it might become a PBE in the future (e.g., whether the entity may undertake an IPO or may be required to have its financial statements included in a registrant’s filing under SEC Regulation S-X, Rule 3-05). Neither the FASB nor the SEC has provided relief or transition guidance for private companies that have elected the private company accounting alternatives and later become PBEs; thus, private companies that might become PBEs should be cautious about electing them. Private companies that do apply the accounting alternatives and later become PBEs would need to retrospectively remove the effects of the accounting alternatives in any financial statements filed with or furnished to the SEC. The removal of such effects could become increasingly complex as more time passes.

Therefore, private companies that may later become PBEs should consider the potential future costs before electing any private-company alternatives. Specifically, paragraph BC32 of ASU 2021-03 notes:

The Board acknowledges that reversing the accounting alternative would pose a challenge if a private company adopting the alternative wished to become a public business entity. To reverse the effects, an entity would need to go back to the date of adoption of the accounting alternative and evaluate (without hindsight) whether there were triggering events during the reporting period, including interim reporting periods, that would have resulted in a goodwill impairment and, if so, measure that impairment. However, those burdens are likely no more significant than would be the case for a private company that elected the alternative to amortize goodwill that subsequently elected to go public. The Board cautions entities that may eventually become public business entities to consider the potential future costs before electing this or any other alternative.

Selection of an annual testing date for goodwill and indefinite-lived intangible assets

The goodwill in each reporting unit, as well as each indefinite-lived intangible asset, must be tested for impairment at least annually. An entity may select any date throughout the year on which to perform its annual impairment test as long as this selection is applied consistently each year. An entity can elect different annual testing dates for different reporting units and different indefinite-lived intangible assets. However, we observe that entities often select the same date for all of their reporting units and indefinite-lived intangible assets.

When selecting an annual assessment date, entities should be mindful of quarterly reporting requirements and filing deadlines to ensure that they have enough time to complete the testing before the financial statements are issued. For this reason, entities often avoid choosing the end of an annual or quarterly reporting period. Public companies often select the first day of their fourth quarter as their annual testing date since (1) they will have the carrying amounts from the last day of the prior quarter available, (2) they have the entire quarter to perform the necessary valuation work, and (3) this timing is often aligned with the timing of the preparation of their budgets and forecasts for the next year. Another common date is the first day of the second month of the fourth quarter (i.e., November 1 for calendar-year-end companies) since that date may be even better aligned with preparation of budgets and forecasts and yet still give the entity enough time to complete testing before the financial statements are issued.

Changing the date of the annual impairment test

An entity is permitted to change its annual impairment testing date. An entity that wants to change its goodwill impairment testing date must evaluate the change as a change in accounting principle under ASC 250. Accordingly, the entity must (1) determine that the change is preferable, (2) ensure that no more than 12 months elapse between the tests, and (3) ensure that the change is not made with the intent of delaying or accelerating a goodwill impairment charge. By contrast, an entity’s testing date for its indefinite-lived intangible assets is not an accounting policy election. An entity that changes its annual impairment testing date for indefinite-lived intangible assets does not have to evaluate the change as a change in accounting principle under ASC 250. However, the entity should ensure that no more than one year elapses between tests.

While a voluntary change in accounting principle should be applied retrospectively, we have observed that entities typically apply a change in goodwill testing date prospectively rather than retrospectively because either (1) they determine that retrospective application would be impracticable on the basis of the guidance in ASC 250-10 or (2) the change does not have a material effect on the financial statements given the existing requirements in ASC 350-20 to assess goodwill for impairment between annual tests upon the occurrence of a triggering event.

An SEC registrant that voluntarily changes an accounting principle is generally required to include a preferability letter issued by its independent registered public accounting firm as Exhibit 18 to its first periodic report filed after the accounting change. However, in the case of a change in the goodwill assessment date, an SEC registrant is required to obtain and file a preferability letter with the Commission only when the registrant determines that a reported change in the date of the annual impairment test is material. However, even if a registrant determines that it is unnecessary to obtain and file a preferability letter related to a change in the annual impairment testing date because the change is immaterial, the staff would still expect the registrant to prominently disclose the change within the applicable filing (e.g., Form 10-K, Form 10-Q).

Market capitalization reconciliation

While not required to do so by ASC 350-20, a publicly traded entity often compares its market capitalization with the aggregate of the fair values of all its reporting units when testing goodwill for impairment because such a comparison can yield useful information about the reasonableness of the fair value measurements. Entities must use judgment when reviewing the comparison for factors that may indicate appropriate differences between the market capitalization and the aggregate sum of the fair value of the reporting units.

The SEC staff frequently refers to an entity’s market capitalization when commenting on the entity’s testing of goodwill for impairment. When an entity’s book value is greater than its market capitalization, questions may be raised about whether goodwill should be tested for impairment or, if goodwill was tested, whether goodwill at one or more reporting units is impaired. Entities should be able to explain how having a greater book value than market capitalization affected their judgments regarding the testing of goodwill for impairment.

Early-warning disclosures

In addition to the requirements in ASC 275-10-50 to disclose certain risks in the financial statements, SEC Regulation S-K, Item 303(b)(2), requires registrants to discuss in management discussion and analysis (MD&A) a known uncertainty—specifically, to disclose the potential for a material impairment charge—in light of potential impairment triggers (i.e., whether the registrant should have provided early-warning disclosures about the possibility of an impairment charge in future periods to help financial statement users understand these risks and how they could potentially affect the financial statements). The SEC staff expects a registrant that has recorded or is at risk for recording an impairment charge to disclose the following:

● The adequacy and frequency of the registrant’s impairment tests, including the date of its most recent test.

● The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.

● The methods and assumptions used in the impairment tests, including how assumptions compare with recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of the fair value of the assets to changes in the assumptions.

● The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.

● The types of events that could result in impairments.

● In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.

● The facts and circumstances that led to the impairments. A registrant should also consider disclosing in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.

In addition, the SEC staff may use hindsight, after an impairment or charge is reported (e.g., a material impairment charge), to inquire why the registrant did not include any early-warning disclosures in prior periods leading up to the reporting of such impairment. Such disclosures alert investors to the underlying conditions and risks that the company faces before a material charge or decline in performance is reported.

Recent Related Accounting Standards

The following recently issued ASUs and proposed ASUs may affect the accounting, presentation, and disclosure requirements related to goodwill and intangible assets:

•  ASU 2023-08 (released in December 2023), which addresses the accounting and disclosure requirements for certain crypto assets. Before the ASU’s issuance, an entity accounted for certain digital assets as indefinite-lived intangible assets in accordance with ASC 350 (i.e., the assets were measured at historical cost less impairment). Stakeholders had raised concerns that, among other factors, this intangible asset model (1) did not faithfully represent the economics of crypto assets and (2) made the recognition of impairments needlessly complex by requiring entities to use a crypto asset’s lowest observable fair value within a reporting period. Accordingly, ASU 2023-08 requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. In addition, entities are required to provide additional disclosures about certain crypto asset holdings. For more information about the requirements of ASU 2023-08, see Deloitte’s December 15, 2023, Heads Up and Roadmap Digital Assets.

• ASU 2024-03 (released in November 2024), which requires the disaggregation of income statement expenses for PBEs. The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. The specific natural expense categories required to be disclosed include the following, as applicable: (1) purchases of inventory; (2) employee compensation; (3) depreciation; (4) intangible asset amortization; and (5) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities or other depletion expenses. A relevant expense caption may include an expense caption that is presented as a natural expense classification on the face of the income statement (e.g., depreciation and amortization). If that expense caption includes more than one of the required natural expense categories, further disaggregation in the disclosure is required. In addition, if, for example, an expense caption includes intangible asset amortization and other types of expenses, that expense caption would need to be further disaggregated so that the intangible asset amortization is separately disclosed in the footnotes. 

Further, in January 2025, the FASB issued ASU 2025-01, which amends ASU 2024-03’s effective date “to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027.” 6 For more information about ASU 2024-03, see Deloitte’s November 8, 2024 (updated January 21, 2025), Heads Up.

A proposed ASU (released in October 2024) that would amend certain aspects of the accounting for and disclosure of software costs under ASC 350-40. Rather than revising the guidance on this topic in its entirety, the Board is proposing targeted improvements to address specific issues raised by stakeholders. For more information about this proposed ASU, see Deloitte’s November 5, 2024, Heads Up.

A proposed ASU (released in December 2024) as part of the FASB’s project (added to its technical agenda in May 2022) on the accounting for environmental credit programs. Comments on the proposal were due by April 15, 2025. 

The objective of the FASB’s project on environmental credit programs is to improve the recognition, measurement, presentation, and disclosure requirements related to (1) environmental credits and, when applicable, (2) compliance obligations that may be settled with environmental credits. Currently, the treatment of such credits and liabilities is not explicitly addressed in U.S. GAAP. An entity’s accounting under the proposed standard is based on its determinations of the expected use of the credits. If the standard is issued as proposed, entities will want to have strong processes and controls related to establishing intent, given the risk that subsequent changes in intent affect subsequent measurement. For more information about the proposed ASU, see Deloitte’s December 20, 2024, Heads Up. 

Pending the finalization of the proposed ASU on the accounting for environmental credit programs, various approaches are currently being used in practice to account for and report environmental credits. For a discussion of those approaches and other considerations related to environmental credits, see Deloitte’s November 16, 2022, Financial Reporting Alert.