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Preparing for transition
New Guidance May Simplify Goodwill Accounting for Credit Union Mergers
Thanks to an accounting update issued by the Financial Accounting Standards Board (FASB) on January 16, 2014, credit unions may be eligible to elect a simpler, alternative accounting treatment for goodwill assets acquired from a merger.
"Electing to follow the FASB’s new guidance may significantly reduce a credit union’s time, effort, and cost of annual impairment testing for goodwill ... The guidance comes at a good time, since the number of credit union mergers has been rising in the past several years due to the current competitive economic and complex regulatory environment." Charles Kelly
credit union assurance senior manager
The FASB issued guidance in 2007 requiring mergers from the fiscal years following December 15, 2008, to use the purchase method of accounting.
Under the purchase method, the surviving credit union is required to assign fair values to loans, investments, time deposits, the core deposit intangible, and any residual goodwill for the merged entity. Generally, credit unions engage a third-party valuation specialist to assist with these fair value determinations.
Goodwill, as it relates to mergers, represents the difference between the fair value of the net assets acquired, plus any other consideration provided by the acquirer (which is generally nothing for credit union mergers), and the value determined for the entity as whole. If the entity valuation exceeds the fair value of the net assets, a goodwill asset must be recognized.
A goodwill asset resulting from a merger previously could not be amortized under the purchase method. It was also required to be tested at least annually for impairment, or more frequently if certain conditions existed that may indicate potential impairment.
To test goodwill for impairment, credit unions had to conduct an annual hypothetical application of the purchase method to find the implied fair value of goodwill after measuring the merged entity’s identifiable assets and liabilities. This also generally required a third-party valuation specialist for each subsequent year’s goodwill impairment test.
"This annual impairment testing ended up being a costly proposition for credit unions, a requirement that essentially would never go away ... Any goodwill assets recognized as a part of a merger could not be amortized under the requirements of U.S. generally accepted accounting principles, and thus required an annual analysis to test for impairment." Charles Kelly
credit union assurance senior manager
Alternative accounting treatment
As a result of a recent Private Company Council (PCC) project to examine accounting treatments for goodwill, the FASB issued Accounting Standards Update (ASU) No. 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill.
This ASU provides an accounting alternative related to merger accounting that private companies can elect to adopt, but which is prohibited for public companies and nonprofits. It appears that credit unions may qualify to be categorized as private companies, as they clearly do not meet the definition of a public company, and credit unions are specifically excluded from FASB’s definition of a nonprofit company. However, the PCC’s alternative accounting treatments have not yet been approved by the National Credit Union Administration (NCUA).
It is unclear at this point whether PCC alternatives will be accepted for regulatory purposes. Kelly says that if a credit union is considering electing PCC alternative accounting treatments for their 2103 audited financial statements, they should closely monitor regulatory announcements.
ASU No. 2014-02 lets private companies adopt an accounting alternative for subsequent years following the merger that would allow them to amortize goodwill acquired through a merger on a straight-line basis (charged at a constant rate uniformly over the life of the asset) over 10 years, or less than 10 years if a shorter useful life can be demonstrated to be more appropriate.
However, ASU No. 2014-02 does not alter the requirements described above for the purchase method to be used in the year of acquisition, which includes determining fair values for certain assets and liabilities as of the date of acquisition as described above.
A private company that elects this accounting alternative is also still required to make an accounting policy decision to test goodwill for impairment at either the entity level or the reporting unit level, but goodwill is only tested for impairment when a triggering event occurs indicating that the fair value of an entity (or reporting unit) may be below its current carrying value. Such triggering events include, but are not limited to:
- deterioration in general economic conditions or the environment in which the credit union operates
- regulatory developments
- declining financial performance
The PCC has further simplified the accounting process by removing the hypothetical purchase method requirement to calculate goodwill impairment in the years following the year of acquisition. The ASU states that a private company can perform an internal analysis to document any perceived impairment of goodwill, thus eliminating the potential need for private companies to employ a third-party valuation specialist.
Implementation of accounting method
If the PCC guidance is approved by the NCUA, the new accounting method should be applied prospectively to goodwill acquired through a merger that exists on your credit union’s balance sheet as of the beginning of the period of adoption, and for new goodwill recognized in annual periods beginning after December 15, 2014.
Early adoption of the accounting method is permitted, including for financial statements available for issuance.
How we can help
Your accounting advisor can answer questions about the alternative accounting treatment and assess how this may affect your credit union. CLA professionals are available to update policies and procedures and to help prepare valuation analyses for loan portfolios, core deposit intangibles, and investment portfolios.