What’s Happening:
The debate around goodwill and intangible asset accounting continues to heat up. The FASB has received sustained feedback on whether goodwill should return to an amortization model (as required under IFRS and private company alternatives) or remain an indefinite-lived, impairment-only model. At the same time, PCAOB inspections are flagging deficiencies in how auditors test goodwill impairment, valuation of customer relationships and trade names, and the sufficiency of evidence around forecasts used in impairment models.
For PE-backed companies, where acquisitions and roll-ups are frequent, goodwill and intangible balances can quickly become material to financial statements, loan covenants, and exit valuations. Getting the accounting right—and audit-ready—is a necessity, not an option.
Why This Matters Now:
- Regulatory direction: FASB’s goodwill project is active, with renewed consideration of mandatory amortization (potentially 10–20 years). SEC staff continue to comment on impairment triggers and disclosures.
- Audit pressure: PCAOB findings cite recurring deficiencies in evaluating management’s cash flow forecasts, discount rates, and assumptions about economic lives of intangibles.
- Deal dynamics: Over-allocation to indefinite-lived intangibles or goodwill can backfire if forecasts miss—leading to impairment charges that affect EBITDA and equity valuations.
- Investor focus: Analysts and boards are pressing for clearer disclosures about intangible amortization policies, impairment judgments, and sensitivity to assumptions.
Where Auditors are Probing (Hot Spots):
- Triggering events: Whether companies are appropriately identifying and documenting impairment triggers (e.g., missed budgets, higher discount rates, macroeconomic headwinds).
- Cash flow forecasts: Tying impairment models to board-approved budgets and reconciling with lender decks.
- Intangible lives: Support for 10–15+ year useful lives for customer relationships or technology, and evidence for renewals/attrition rates.
- Royalty rates: Benchmarking used in trade name valuations and whether market comparables support chosen rates.
- Unit of account: Testing whether reporting units are appropriately defined under ASC 350 (especially post-acquisition integration).
What “Good” Looks Like:
- Policy clarity: Documented policy memos addressing goodwill impairment testing methodology, triggering event assessments, and rationale for intangible useful lives.
- Audit-ready models: Valuation models with sensitivity analyses and clear links back to board materials.
- Governance: Ownership of key assumptions (e.g., attrition, WACC, renewal rates) and a change log across models.
- Disclosures: Expanded footnote disclosures for goodwill and intangibles, including methodology, assumptions, and segment-level information, aligned with ASC 350 and ASC 360.
- Scenario planning: Pre-testing alternative impairment scenarios to anticipate potential audit or investor question
Immediate Actions You Can Take:
- Update goodwill policy memos to reflect current FASB proposals and clarify impairment methodology.
- Reconcile impairment models with budgets, lender decks, and board materials to eliminate inconsistencies.
- Validate attrition and royalty assumptions with external benchmarks and retain evidence.
- Review useful lives of intangibles—ensure economic support for 10+ year amortization periods.
- Refresh disclosures to align with ASC 350/360 requirements and peer practices.
How Virtas can help
Virtas has extensive expertise in technical accounting and financial reporting. We work alongside your team to ensure complex transactions, policies, and disclosures are properly assessed, documented, and communicated.
Our Professionals Provide:
- Expertise in U.S. GAAP and SEC reporting requirements
- Support to meet close and reporting deadlines
- Guidance to strengthen disclosures and internal controls and reduce compliance risk
- Practical insight to enhance readiness for transactions and investor engagement