Question

In early 2001, Ride Along Corporation (Ride Along or the “Company”), a domestic company that does not meet the definition of a public business entity, began manufacturing and selling bicycles to retail stores nationally. Ride Along’s fiscal year ends on December 31, and it has been experiencing growth over the past decade. Ride Along is required to prepare and issue annual consolidated financial statements to its shareholders and the local bank. These financial statements are to be prepared in accordance with U.S. GAAP. Ride Along is 75 percent owned by a private equity firm and 25 percent owned by its founder. The founder and private equity firm plan to either take Ride Along public in an initial public offering (IPO) or sell it to an existing public company in five years. Ride Along tests goodwill for impairment annually on November 30 and has determined that each of its goodwill reporting units is a legal entity. On February 1, 2012, Ride Along acquired 100 percent ownership of a bicycle tire manufacturer, Mini Tires Company (Mini). The purposes of the acquisition were to reduce the cost associated with buying bicycle tires from third-party suppliers and for Ride Along to expand its operations by selling tires directly to retail stores. Mini met the definition of a business1 but did not meet the definition of a public business entity (PBE). The founder of Mini will work as an employee of Ride Along and has signed a two-year noncompete agreement. Ride Along paid cash of $20 million (purchase price), which resulted in goodwill of $6 million and an intangible asset (a customer list) of $2 million. During 2013, Ride Along continued to gain market share in the bicycle industry and determined it wanted to own retail stores. On June 1, 2013, Ride Along acquired 100 percent ownership of 10 independently owned retail stores and recorded $10 million of goodwill as part of the acquisitions. In January 2014, the FASB issued ASU 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill — a consensus of the Private Company Council. During 2014, the founder of Mini resigned from Ride Along and started a new business after his noncompete agreement expired. With his departure, 45 percent of the customers on Mini’s original customer list, which was classified as an intangible asset on Ride Along’s statement of financial condition, provided notice that they would no longer do business with Ride Along. This migration resulted in an impairment of the customer list intangible. These customers represent 35 percent of total future revenue for the Tire reporting unit and the loss of these customers reduced the fair value of Mini by 35 percent. No other management changes are expected. Even with the loss of Mini’s customers, Ride Along performed well because of the strength of the retail stores and strong bicycle sales leading to results that exceeded expectations. Therefore, Ride Along increased its revenue and operating income in its five-year forecast; cash flows continue to be positive.

Furthermore, general economic conditions are stable for all reporting units, including debt and equity markets. Ride Along is a private company that does not actively trade its shares; however, because of stable economic conditions and the Company’s increasing revenue and operating income, had Ride Along traded its shares, the value of these shares would have steadily increased. Labor costs and material for each reporting unit have increased in line with inflation and are expected to do so for the foreseeable future. As of December 31, 2014, before considering the departure of Mini’s founder, the fair value of Ride Along was $210 million (fair value by reporting unit is as follows: Bicycle, Tire, and Retail stores were 55 percent, 10 percent, and 35 percent, respectively) and the carrying value, including goodwill, was $145 million (carrying value by reporting unit is as follows: Bicycle, Tire, and Retail stores were $65 million, $20 million, and $60 million, respectively). Required 1. ASU 2014-02 is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. What should Ride Along consider before deciding whether to adopt the private-company alternative in ASU 2014-02? 2. Assuming Ride Along adopts the goodwill alternative in ASU 2014-02, may Ride Along subsequently change its accounting for goodwill and revert to PBE GAAP? If so, how would Ride Along account for this change and what disclosures must it include in the consolidated financial statements? For the questions below, assume Ride Along early adopted ASU 2014-02 in 2014. 3. For the year ended December 31, 2014, describe (in detail) the analysis that Ride Along would perform to support whether its goodwill is recoverable or impaired as well as the accounting conclusion reached assuming it elected to test goodwill at the entity level. If the Company concludes that its goodwill is impaired, what would it record as the amount of the goodwill impairment? In addition, provide a separate analysis and related accounting conclusion (including the amount of the goodwill impairment charge if goodwill is impaired) assuming Ride Along elected to test goodwill at the reporting unit level. 4. Assume Ride Along (or one of its reporting units) has zero or negative equity. How would Ride Along perform its goodwill impairment assessment?

Answer 1

1. Adoption of ASU 2014-02 allows a private company to amortize its existing and new goodwill on a straight-line basis over a maximum of 10 years. Further, ASU 2014-18 eliminates the need for identifying certain intangible assets acquired in a business combination and the value of such assets are attributed to goodwill. Non-compete agreements and customer-related assets are such intangibles that are not capable of being sold or licensed independently of other business assets.

Before deciding whether to adopt the private-company alternative in ASU 2014-02, Ride along must take into account

• That if Ride along goes public or is acquired by a public company, the company must discontinue the use of ASU 2014-02 and must retroactively restate its previously issued financial statements utilizing U.S. GAAP applicable to public companies. Hence, Ride Along would have to recognise need to reverse previously amortized goodwill, while recognizing intangibles previously subsumed into goodwill. This process of valuing customer-related and noncompetition assets is pricey and challenging because the value of these assets will be determined as on the original acquisition date of business combination.
• That such alternative tends to result in companies reporting lower profits and total asset balances due to goodwill amortization.

1. Post selection of ASU 2014-02, Ride Along subsequently become a public company or is subject to Public company reporting (as user of financial statements, including regulators, lenders or other creditors, require a private company to continue to apply traditional GAAP accounting standards), it is required to recast prior periods as if it hadn’t elected the alternative.

• Ride Along must retroactively restate its previously issued financial statements utilizing U.S. GAAP applicable to public companies. Hence, Ride Along would have to recognise intangibles previously subsumed into goodwill and remove amortization impact.
• Further it will have to test for goodwill impairment annually.

1. Upon selection of ASU 2014-02, an entity must further make a accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.

Goodwill should be tested for impairment when a triggering event occurs instead of performing annually. In such event, the entity has the option to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that it is more likely than not (about 50%) that goodwill is impaired, the entity must perform the quantitative test to compare the entity’s fair value with its carrying amount. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing is unnecessary.

Impairment is measured as the difference between the carrying value of the entity or reporting unit and its fair value, assuming the carrying value is higher. This amount is then written off of currently recorded goodwill. The disclosures required under this alternative are similar to existing U.S. GAAP.

	Goodwill	Impairment
Mini (Feb 2012)	8	0.9 (45% of 2 mn is impaired on departure of Mini)
Retail (June 2013)	10

At entity level, the impairment to be accounted for is 0.9 Mn

	Bicycle	Tyre	Retail stores
Fair value	115.5	21	73.5
Carrying value	65	20	60

At the reporting unit levels i.e. bicycle/tyre and retail stores, there is no impairment.

1. The goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units