FASB Allows Nonprofit Entities to Apply the PCC Alternative on Goodwill and Intangibles

By Josh Cross, CPA, Principal

In 2014, the FASB issued ASUs 2014-02 and 2014-18, which originated as standards developed by the Private Company Council (PCC) based on feedback from privately held companies.  The standards addressed the accounting for goodwill and certain identifiable intangible assets acquired in a business combination.  Initially, the new PCC standards did not apply to nonprofit organizations.

In May 2019, the FASB issued ASU 2019-06, which now extends these private company standards to nonprofit organizations.  As these standards are alternatives to existing GAAP, they must be elected by the Organization.  If elected, the provisions related to the goodwill accounting are applied prospectively for all existing goodwill, as well as to all future goodwill.  This is an all-or-nothing adoption, which will require the organization to assess their specific situation and the impact this standard will have, not only in the year of adoption, but in the future.  Application of the provisions included in the alternative for accounting for intangible assets, if elected, are also applied prospectively upon the first transaction which falls within the scope of this alternative.  Keep in mind that these are “alternatives” and are not required to be adopted by any organization.  Just like for private companies, there is an open-ended effective date and the organization does not have to assess the preferability of the new standard upon adoption.

One key provision to note, if an organization adopts the alternative for accounting for intangible assets, it must also adopt the alternative to amortize goodwill.  However, a nonprofit organization that elects to amortize goodwill is not required to automatically adopt the alternative for accounting for intangible assets.

Key Provisions – Goodwill

Prior to the PCC alternative, under GAAP, an organization was not allowed to amortize goodwill and was required to perform an annual assessment, which became very time consuming and sometimes subjective.  Under this new standard, a nonprofit organization will be allowed to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the organization can demonstrate that a shorter life is more appropriate.  The organization may still be required to perform an impairment test if a triggering event occurs that indicates the fair value of the existing goodwill is below its carrying value.

Although it might sound great to eliminate the need to perform the annual impairment test, upon adoption, the organization will be recording an adjustment to the P&L for 1/10th of the goodwill amount each year.  In situations where an organization is carrying a significant goodwill balance, this could have a negative effect on the profitability ratios of the organization and may cause the organization to be out of compliance with certain bank covenants.  Before adopting this alternative, the organization needs to do a full assessment of the impact this will have on all areas of the organization.

Key Provisions – Intangible Assets

Under the amendment, nonprofit organizations entering into business combinations after the adoption of the alternative, are allowed to incorporate certain intangible assets into goodwill and amortize them based on the provisions outlined.  The allowed intangibles include all customer-related intangibles which are not capable of being sold or independently licensed and all noncompetition agreements.

Conclusion

The goal of the standards spearheaded by the PCC is to help reduce costly and complex accounting requirements for private companies and, now, nonprofits.  Although the standards do reduce cost and complexity related to goodwill impairment and intangible assets, not all situations are equal and the impact of adopting the alternatives should be assessed for each organization to identify all of the areas that will be impacted by the adoption and whether or not the desired outcome will be achieved upon adoption. If you have any additional questions about these standards, please reach out to our Nonprofit Group.