Will the new reporting method for goodwill affect your company’s merger?

In January 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides private companies with an alternate method of reporting goodwill under Generally Accepted Accounting Principles (GAAP). Adopting FASB’s standard could reduce the cost and complexity of preparing financial statements for private companies following business combinations. However, this alternate method may prove troublesome if your business is subsequently acquired by a public company and the event triggers revised accounting rules.

Goodwill is a non-physical asset that represents the additional “value” the buyer receives for the acquired company’s brand, customers, reputation, employees or anything else of indeterminable value not listed as a transferring asset in the agreement.

Simpler method

When a company’s sale price exceeds the fair value of its assets and liabilities, the buyer records goodwill on its balance sheet. According to ASU 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill, private companies can now elect to write down goodwill over a 10-year period (amortize) — sometimes over a shorter period if circumstances warrant. This means that over the course of, say 10-years, the value of the goodwill asset could decrease to $0.

By contrast, public companies must run annual impairment tests to determine whether the carrying value of goodwill exceeds its current “fair value.” If so, the company must reduce the carrying value of goodwill on the balance sheet and report an impairment loss on the income statement.

Regardless of whether a company is public or private, all businesses must test for goodwill impairment if a triggering event — such as the loss of a key person or an unexpected increase in competition — occurs. With impairment, if nothing unexpected occurs to warrant the decrease in value, the original value of the goodwill could remain on the books until the business ceases.

Worst-case scenario

Electing this alternate reporting method may appeal to private businesses hoping to save time and money. However, if a private business is acquired by a company that’s required to include its acquisition’s historical financials in a new SEC filing, the accounting can get complicated.

Under current rules, a public buyer has to revise all of the acquired private company’s previous goodwill amortization, which could require a major accounting expenditure. So if you adopt the new accounting standard, it might make your private business less attractive to certain public company buyers.

Hard decision

FASB currently doesn’t offer a transition plan for private businesses that adopt the new accounting standard and are subsequently purchased by public companies. However, many analysts expect that FASB will extend the alternate reporting method for goodwill to public companies (as well as nonprofits) in the future.

If you’re considering selling your private business, discuss with CJA the benefits of adopting the alternate reporting method for goodwill against the potential headaches of retroactively undoing it.

This information is, in part, © 2014 TRTA

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Things a forensic expert for a government contractor knows

Forensic accountants/CPAs require unique skills and training in order to blend accounting, auditing, and investigative skills to uncover and analyze financial data. In addition, to uncovering fraud, forensic accountants/CPAs provide litigation support in a courtroom setting. If you are a government contractor, considering hiring a forensic accountant or CPA, here are five things your forensic expert should know:

1. Government Contractors and their Unique Accounting Needs

Extensive experience in assisting government contractors is critical. CPA firms like Cheryl Jefferson & Associates are familiar with the specific needs of government agencies, their frequently changing regulations, and how to navigate a government contract audit. An experienced forensic CPA can provide more accurate service, more quickly, and know what to look for as it relates to government contract requirements.

2. Small Businesses and Their Internal Control Limitations

Small business accounting may appear to be simpler than that of a larger business. This isn’t always the case as many subtle nuances must be considered when working with smaller companies. A forensic CPA/accountant that specializes in these types of clients and are aware of all the intricacies that come with them, will be more fluent their particular internal controls. This will significantly reduce the time spent on researching accounting and taxation matters.

3. Cost and Revenue Sharing Joint Ventures Disputes

Forensic accounting specialists that have a great deal of experience in analyzing cost and revenue sharing arrangements, and can greatly expedite resolving joint ventures disputes. Because joint venture disputes require special knowledge, your forensic expert should have experience with accounting for joint ventures in order to adequately resolve all issues. Cost analysis can dramatically change the outcome of such contracts so there is a lot at stake. It is important to hire the right team that can support a fair resolution.

4. False Claims Act & Unallowable Payments

An experienced forensic CPA/accountant can offer advice on accounting practices and transactions that  may violate the False Claims Act and other matters of unallowable payments. Such information can help your company avoid committing fraud against the government, as well as defend against false claims act charges. Government contractors often need consulting on how to navigate these issues to avoid further claims so a high-quality forensic advisory service is essential.

5. Fraud in Financial Reporting and Employee Theft

No company wants to deal with fraud, but the unfortunate truth is fraud, bribery and corruption cases continue to rise. A forensic CPA can conduct extensive review on financial reports to identify possible fraud. Employee theft can be uncovered by specialists through the examination of company financials records and assets. An experienced CPA will know what to look for in order to identify fraud or employee theft within your business.

Cheryl Jefferson & Associates provides accounting, auditing, and advisory services to small businesses and government contractors, in conjunction with the comprehensive forensic accounting services of CJA Forensic Accounting, for your business. Our principal is certified in financial forensics (CFF) and is dedicated to make sure you receive a high-quality experience. We are confident that we will be able to take care of your company’s needs. Contact us to get the facts today!

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