What are the main provisions of this ASU?
Current guidance in FASB ASC 805 provides for three elements of a business:
Inputs
Processes
Outputs
Typically, an integrated set of assets and activities (“a set”) that constitute a business usually has outputs. However, outputs are not required to be present. In addition, not all of the inputs and processes used by a seller need to be included in the set if the purchaser can separately obtain or already has those inputs and processes or can produce outputs without them.
This update provides an additional step (the screen) in the evaluation process to determine when a set is not a business. When substantially all of the fair value of the set of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or a group of similar identifiable assets, the set is not a business.
If the screen is not met, the update requires that, in order for the set to be considered a business, the set must include, at a minimum, an input and substantive process that together significantly contribute to the ability to create an output.
In addition, this update removes the evaluation of whether a market participant could replace the missing elements and narrows the definition of “output” so that it aligns with FASB ASC 606, Revenue Recognition.
When will this ASU be effective?
For public business entities, the amendments of this update are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
For all other entities, the amendments of this update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
This update should be applied prospectively. No disclosures are required at transition. Early application is permitted in certain circumstances.
Knowledge check
1 Which of the following is not an element of a business when determining whether or not an acquisition is an acquisition of an asset or an acquisition of a business?Process.Outputs.Profits.Inputs.
FASB ASU No. 2017-04, Intangibles— Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
Why was this ASU issued?
Subsequent to the Private Company Council project to simplify accounting for goodwill, FASB began a project to determine if some of the elements of this initiative could be carried over to not-for-profit entities and public companies. This update is a result of the first phase of this project and simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the impairment test.
Who is affected by this ASU?
The amendments of this update apply to all public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for subsequent measurement of goodwill.
What are the main provisions of this ASU?
The amendments of this update eliminate step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment has also been eliminated. However, an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
When will this ASU be effective?
A public business entity that is a U.S. SEC filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
A public business entity that is not an SEC filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
All other entities, including not-for-profit entities, that are adopting the amendments in this update, should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.
Early application is permitted for goodwill impairment tests performed on testing dates after January 1, 2017.
An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update.
Knowledge check
1 Upon adoption of FASB ASU No. 2017-04, an entity can assume that an excess of the carrying amount of an entity over the fair value of the entity is an impairment ofIntangible assets.Goodwill.Treasury stock.Equity method investees.
FASB No. ASU 2017-05, Other Income–Gains and Losses from Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
Why was this ASU issued?
This update is a clarification of the scope of FASB ASC 610-20, Other Income and to add guidance for partial sales of nonfinancial assets, FASB ASC 610-20, issued as part of FASB ASU No. 2014-09, Revenue from Contracts with Customers) (Topic 606).
When issued, FASB ASU No. 2014-09 addressed not only revenue from customers, but also provided guidance for recognizing a gain or loss from the transfer of nonfinancial assets in contracts with noncustomers. Stakeholders were uncertain about what types of transactions should be within the scope of FASB ASC 610-20 because the term in substance nonfinancial asset was not defined. Stakeholders also noted that other aspects of the scope of FASB ASC 610-20 were confusing and complex. For example, stakeholders were unclear about why a transfer of a nonfinancial asset to another entity in exchange for a noncontrolling interest in that entity was excluded from the scope of FASB ASC 610-20 (and, instead, was within the scope of FASB ASC 845, Nonmonetary Transactions), while a transfer of a nonfinancial asset for any other form of noncash consideration was within the scope of FASB ASC 610-20.
In addition, stakeholders also indicated that they were uncertain about how an entity should account for partial sales of nonfinancial assets once the amendments in FASB ASU No. 2014-09 become effective.
Who is affected by this ASU?
The amendments in this update affect