ASU 2014-02 was issued in January 2014 and its provisions may be elected by entities that are not public business entities, not-for-profit entities or employee benefit plans. Through the early adoption provision entities may elect to begin amortizing goodwill as soon as their December 31, 2013 financial statements, for calendar year companies, as long as those financial statements have not been made available for issuance prior to January 16, 2014.

1. The Substance of the Standard
TM
MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM
A publication of the Professional Standards Group
February 2014
Changes to the Accounting for Goodwill for Private Companies
The Financial Accounting Standards Board (FASB) has
finalized the first accounting alternative proposed by the
Private Company Council (PCC) related to the accounting
for goodwill by private companies; Accounting Standards
Update (ASU) 2014-02 Intangibles – Goodwill and Other
(Topic 350): Accounting for Goodwill (ASU 2014-02).
Accounting for Goodwill
ASU 2014-02 provides certain accounting policy elections
that may be made by a qualifying private company with
respect to the accounting for goodwill. Entities that qualify
are those that do not fall into one of three categories:
a) public business entity as defined under ASU 201312(see MHM Messenger 2014-02) b) not-for-profit entity
and c) employee benefit plans. ASU 2014-02 contains
three significant components including the amortization
of goodwill, the removal of the requirement to conduct an
annual impairment test of goodwill and modifications of the
impairment test methodology. These three components are
described in more detail below.
Goodwill Amortization
Contents
Accounting for Goodwill...... 1
Considerations when
Adopting ASU 2014-02...... 6
Implementation Steps......... 6
For More Information.......... 7
Appendix: Summary of
Significant Changes............ 8
our
In summary:
ASU 2014-02 was issued in January 2014 and its provisions
may be elected by entities that are not public business entities,
not-for-profit entities or employee benefit plans. Through the
early adoption provision entities may elect to begin amortizing
goodwill as soon as their December 31, 2013 financial statements, for calendar year companies, as long as those financial
statements have not been made available for issuance prior to
January 16, 2014. See the Summary of Significant Changes
for the key differences under ASU 2014-02.
roots run deep
TM
If an entity elects to amortize goodwill, all existing goodwill recognized as a result of a business combination
under ASC Topic 805 Business Combinations, fresh start
accounting under ASC Topic 852 Reorganizations and
goodwill recognized when applying the equity method of
accounting under Topic 323 Investments – Equity Method
and Joint Ventures must be amortized as the election cannot be applied on an individual acquisition basis.
The goodwill arising from each individual business acquisition represents an amortizable unit and each unit has
its own expected useful life. That amortization period is
presumed to be 10 years, unless it can be demonstrated
that a period of less than 10 years is more appropriate.
As shown in the example below, a period of less than
10 years may be appropriate based on an evaluation of
specific facts and circumstances. In most circumstances,
it would not be necessary to justify using an amortization
period of 10 years.
When events occur or facts and circumstances change
such that the remaining useful life of goodwill should be
changed, an entity should re-evaluate that life. In no event
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PAG E 1

2. should goodwill be amortized over a period greater than
10 years. If a change occurs in the expected remaining
useful life, the remaining unamortized goodwill should be
amortized prospectively over the new life as a change in
accounting estimate.
Example:
ABC Corporation acquires ZXY, LLC on March 1, 2014 for
$5 million cash in order to acquire a new medical technology. The identifiable assets and liabilities of ZXY, LLC are
recorded at fair value by ABC Corporation resulting in $1.2
million of goodwill. ZXY, LLC’s cash flows are derived from
the sale of one type of exclusive medical technology. This
technology was estimated to be productive for a period of
at least 20 years at the time of the acquisition.
ABC Corporation had previously elected to amortize
goodwill under ASU 2014-02 and at the time of adoption
elected to test goodwill for impairment on an entity wide
basis (rather than at a reporting unit level). On March 1,
2014, ABC Corporation records $1.2 million of goodwill
and begins to amortize the goodwill over a 10-year life, the
maximum period allowed under ASU 2014-02. As of December 31, 2014, ABC Corporation recognizes $100,000
of amortization expense for the year and has net remaining goodwill of $1.1 million.
On January 1, 2015, ABC Corporation discovers the existence of a new procedure that will make the technology
of ZXY, LLC obsolete within five years and as a result the
product is not expected to produce cash flows after that
time. ABC Corporation performs an impairment test at the
entity wide level, and as a result of strong sales in other
product lines, no impairment is identified. ABC Corporation
estimates a remaining useful life of five years from January
1, 2015 and begins to amortize the remaining balance of
goodwill over the revised period. For the year ended December 31, 2015, ABC Corporation recognizes $220,000
of amortization expense and has net remaining goodwill
related to ZXY, LLC of $880,000.
Circumstances when a Goodwill Impairment Test is
Required
Under U.S. GAAP, if the accounting alternative of ASU
2014-02 is not elected, goodwill has an indefinite life and,
similar to indefinite-lived intangibles, is required to be tested for impairment at least annually. Each unit of goodwill is
tested for impairment separately based on its associated
reporting unit. A reporting unit is a component of the entity
that is an operating segment or one level below an operating segment (see box at right).
Components:
An operating segment is a component of an entity that has
three characteristics: a) it engages in business activities from
which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other
components of the same entity) b) its operating results are
regularly reviewed by the entity’s chief operating decision
maker to make decisions about resources to be allocated to
the segment and assess its performance and c) it has discrete
financial information available.
A component that is one level below an operating segment
has discrete financial information that segment management
regularly reviews the operating results of and it has economic
characteristics dissimilar from other components.
When ASU 2014-02 is adopted, an entity must elect to
perform the impairment test for goodwill on an entity wide
basis or on a reporting unit basis. An entity that has elected to amortize goodwill will use this elected basis when it
performs the impairment test described at right.
An entity that elects to amortize goodwill does not perform
an impairment test unless events or circumstances indicate that the fair value of the entity (reporting unit) may
be less than its carrying value, similar to the requirements
for a long-lived asset. Events or circumstances that may
indicate impairment exists, also called triggering events,
include macroeconomic, industry and market, cost, financial performance and other events.
Impairment Test Methodology
Existing U.S. GAAP has a three-step methodology to the
annual impairment test for goodwill (see box on page 3).
With the adoption of ASU 2014-02 and election to amortize goodwill, an entity’s impairment test is only performed
when a triggering event occurs as discussed above.
When a triggering event occurs under ASU 2014-02, an
entity can choose to perform a qualitative analysis (step
0) or go directly to a quantitative analysis. A qualitative
analysis involves evaluating factors to determine if it is
more likely than not that goodwill is impaired (i.e. the fair
value of the entity [reporting unit] is less than its carrying
value). If it is more likely than not that goodwill is impaired,
then the quantitative analysis is performed. The qualitative
factors that are considered follow the guidance of a Step 0
impairment test for goodwill as described in ASC 350-2035-3C.
If an entity elects to bypass or fails the qualitative assessment, the quantitative analysis of impairment is performed
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PAGE 2

3. Impairment Model Flow Chart
(excerpt from ASU 2014-02)
Annual Goodwill Impairment Test Model:
Step 0: At the option of the entity, perform an analysis of qualitative factors to determine if it is more likely than not that the
fair value of the reporting unit is less than the carrying amount
of the reporting unit.
Triggering Event:
Has an event occurred or
circumstances changed that would
indicate that the fair value of the
entity may below its carrying
amount?
(see note 1)
Step 1: Calculate the fair value of the reporting unit and compare its fair value to the carrying value of the reporting unit.
Step 2: If the fair value of the reporting unit is less than its
carrying value, then perform a hypothetical purchase price
allocation. The allocation results in the fair value of individual
assets and liabilities being determined in order to compute the
remainder, which is the fair value of goodwill. If the fair value
of goodwill is less than its carrying value, the difference is the
amount of impairment recognized.
Yes
Qualitative Assessment:
Evaluate relevant events or circumstances
to determine whether it is more likely
than not that the fair value of the entity is
less than its carrying amount (see note 2)
at the date of the triggering event, which may be different
from the reporting period or the date that the annual impairment tests were previously performed by the entity.
Is it more likely than not that the
fair value of the entity is less than
its carrying amount?
When performing the quantitative test of goodwill impairment under either model, the test for goodwill is performed
subsequent to any required test of impairment for longlived assets. Thus the carrying amounts of long-lived assets that are determined to be impaired are adjusted prior
to performing the impairment test on goodwill. When the
quantitative impairment test is performed under the triggering event model there are two steps which differ from the
annual impairment test model.
No
Yes
Calculate the fair value of the entity
and compare with its carrying amount,
including goodwill.
The first step in the quantitative analysis is to compute
the fair value of the entity (reporting unit) and compare
the computed fair value to the carrying value of the entity
(reporting unit) including any recognized deferred income
taxes and goodwill.
Is the fair value of the entity
less than its carrying amount?
No
If the fair value of the entity (reporting unit) is less than its
carrying value, the second step is to compute the amount
of impairment, which is the difference between the two.
When multiple units of goodwill are grouped together for
the impairment test — for instance when testing goodwill
for impairment at the entity level — the allocation of the
impairment loss is performed on a reasonable and rational
basis. If no other reasonable and rational basis for allocation can be determined, it is permissible to allocate the
impairment loss on a pro rata basis across all of the units
of goodwill. It is not permissible to recognize a loss greater
than the carrying amount of goodwill.
Note 1: An entity may elect to test goodwill for impairment at either the entity or
reporting unit level. For simplicity the flowchart refers to the entity level.
If an impairment loss is recognized, the adjusted balance
of goodwill is its new basis and the new basis is amortized
Note 2: An entity has the unconditional option to skip the qualitative assessment
and proceed directly to calculating the fair value of the entity and comparing that
value with the carrying amount, including goodwill.
Yes
Recognize impairment
equal to difference
between carrying amount
of the entity and its fair
value, not to exceed the
carrying amount of
goodwill.
Stop
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PAGE 3

4. over the remaining life of goodwill. Once recognized, an
impairment loss may not be reversed.
Example:
The Lighting Company, Inc (Company) has determined it
has two components consisting of the manufacturing of
light bulbs and the manufacturing of light fixtures. When
these businesses were acquired, the Company recorded
goodwill of $5.0 million and $2.5 million for lights bulbs and
light fixtures, respectively. The Company elected to use the
accounting alternative permitted in ASU 2014-02 and has
elected to test goodwill impairment at the entity level.
In March of 2014, the Company determined that there was
a significant change in economic circumstances related to
its business due to an economic downturn and the entry
of new competition into the market place. As a result, the
Company performed the quantitative impairment analysis
resulting in the following:
Carrying value of the Company
including goodwill:
Fair value of the Company:
$28.0 million
25.5 million
Impairment loss:
$ 2.5 million
The Company estimated that the results of the economic
changes and new competition would result in a decline in
the profitability of the light fixture business of $1 million per
annum and of the light bulb business of $250,000 per annum and determined that a reasonable allocation would be
based on the relative decline of each business. Therefore,
an impairment loss of $2.0 million (80%) was allocated to
the light fixtures business and $500,000 (20%) to the light
bulb business.
Fair Value Measurement
The fair value of an entity (reporting unit) is the price that
the entire unit would be sold for in an orderly transaction
between market participants. It is measured at the date
of the triggering event. The fair value of the entity (reporting unit) may be measured using one of several methods
depending on the information available and its reliability.
The method chosen must be consistent with the objective
of measuring the price that a market participant would pay.
The computation of fair value for an entity (reporting unit)
is typically performed using either a market or income approach. In certain instances a cost approach may be more
appropriate, however, such instances are not common.The
most commonly applied market approach method include
using a quoted market price or a market multiple. When
using a quoted market price, the security being valued —
in this case the equity of the entity or the reporting unit
— is valued based on the quoted market price in an active
market, for example a stock exchange ((i.e. market capitalization). Since a private company would not have traded
securities, a quoted market price would not be available.
The second market-based fair value method that is commonly used is a market multiple. Market multiples are
often based on a multiple of earnings or revenue and are
based on the multiples computed based on entities that
have been recently acquired that have comparable operations and economic characteristics to the entity (reporting
unit). It may be difficult to find multiples that are known for
entities of comparable nature, scope or size to the entity
(reporting unit) and care must be applied to adjust the
market comparables identified to ensure they are truly
comparable.
An alternative to the market approach is to use an income approach. A commonly used income approach is
to estimate the future cash flows of the entity (reporting
unit) and apply appropriate discount rates to compute the
present value of the expected cash flows from a market
participant point of view. When using an income approach
to determine the fair value of an entity (reporting unit), consideration must be given to many different assumptions,
including growth rates, terminal value and discount rates.
The determination of fair value under any model may require the use of a valuation specialist. It is also appropriate
to consider control premiums and discounts for purposes
of performing the goodwill impairment test.
Accounting for Goodwill within an Equity Method
Investment
When an equity method investment is acquired, there is
normally a difference between the cost of the investment
and the amount of the underlying equity of the investee.
This difference is accounted for as if the investment were
in a consolidated subsidiary, which results in differences in
the book value of the assets of the investee and fair value
at the time of acquiring the investment. This difference
normally includes goodwill.
When the election permitted under ASU 2014-02 is applied, the goodwill acquired in an equity method investment is amortized following the guidance outlined above.
However, there is no separate impairment test for equity
method goodwill. Instead, the entire equity method investment is subject to review for impairment as described in
ASC 323 Investments – Equity Method and Joint Ventures.
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PAGE 4

5. Example:
On January 1, 2014, ABC Corporation acquires a 25%
interest in MN, Inc. for $2,000,000. At the time the investment is acquired, MN, LLC’s U.S. GAAP basis financial
statements report total stockholders’ equity of $5,000,000.
ABC Corporation computes the difference between the
cost of the investment and the amount of its interest in
MN, Inc. at its underlying value as $750,000 ($2,000,000
- $5,000,000 * 25%). Acting as if its investment in MN,
Inc. were an investment in a consolidated subsidiary, ABC
Corporation determines that $500,000 of the difference is
related to the value of property, plant and equipment and
the remaining $250,000 is related to goodwill. As a result
of the acquisition and ABC Corporation’s election to use
the accounting alternative under ASU 2014-02, it amortizes the goodwill related to its investment in MN, Inc. over
10 years, resulting in $25,000 of amortization in the year
ended December 31, 2014.
When the accounting alternative is elected, an entity discloses in its financial statements for each period presented
the following:
• The gross carrying amounts of goodwill, accumulated
amortization, and accumulated impairment loss
• The aggregate amortization expense for the period
• Goodwill included in a disposal group classified as
held for sale in accordance with paragraph 360-10-459 and goodwill derecognized during the period without
having previously been reported in a disposal group
classified as held for sale.
In a period in which an entity initially recognizes goodwill, the following are disclosed:
• The amount assigned to goodwill in total and by major
business combination or by reorganization event resulting in fresh-start reporting
Derecognition of Goodwill
• The weighted-average amortization period in total and
When the accounting alternative under ASU 2014-02 is
elected and the sale or disposal of a business occurs, the
goodwill associated with the disposed business is included
in the carrying amount of the assets and liabilities disposed in order to compute the gain or loss recognized. If
a portion of a business is disposed (assuming it still meets
the definition of a business), the goodwill is allocated to the
disposed portion based on the relative fair value of the disposed unit to the retained operations on a pro rata basis.
the amortization period by major business combination or by reorganization event resulting in fresh-start
reporting.
Additional disclosure is required when an impairment
loss is recognized by an entity during the period.
These disclosures include:
• A description of the facts and circumstances leading to
the impairment
Presentation and Disclosure
As with existing U.S. GAAP, goodwill is presented on
the statement of financial position (balance sheet) as a
separate line item. However, with the election of alternative provided by ASU 2014-02, goodwill is presented net
of accumulated amortization. Within the statement of
operations (income statement), the amortization or impairment of goodwill is an expense of continuing operations
and should be classified within the line items of continuing
operations that are determined to be the most appropriate.
The amortization or impairment of goodwill would not be
considered a component of other expense or an extraordinary item; however, in the event that goodwill amortization
or impairment is associated with a discontinued operation,
it should be presented in discontinued operations on a net
of tax basis consistent with the guidance of ASC 205-2045 Other Presentation Matters.
• The amount of the impairment loss and the method of
determining the fair value of the entity or the reporting
unit (whether based on prices of comparable businesses, a present value or other valuation technique,
or a combination of those methods)
• The caption in the income statement in which the impairment loss is included
• The method of allocating the impairment loss to the
individual amortizable units of goodwill.
When an impairment loss is recognized, an entity is not
required to disclose the fair value hierarchy level of the fair
value measurement of the entity (reporting unit).
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PAGE 5

6. Transition
The effective date for ASU 2014-02 is for periods beginning after December 15, 2014, which for calendar year entities is the year ended December 31, 2015. Early adoption
is permitted, therefore a qualifying entity may adopt the
standard for any financial statements that have not been
made available for issuance as of January 16, 2014.
Upon adoption, this standard requires that the elections
provided be performed for all goodwill owned by an entity
on a prospective basis. Therefore, the existing carrying
balance of goodwill will be amortized over its remaining
useful life, not to exceed 10 years, for the entire year in the
year of adoption. This may require an entity to determine
the acquisition date goodwill associated with any equity
method investment acquired. For a calendar year entity
adopting ASU 2014-02 for its 2013 financial statements the
entity would record amortization expense beginning January 1, 2013.
Goodwill amortization may result in an overall decrease in
net income and total assets. When an entity is a tax paying
entity, this decrease may be partially offset or increased
by deferred taxes depending on the tax life and age of the
goodwill being amortized. Therefore, covenants based
on net income, total assets or equity that were designed
without contemplating amortizing goodwill may need to be
carefully analyzed before adopting. Covenants based on
earnings before interest, taxes, depreciation and amortization (EBITDA) and on tangible net worth should not be
impacted.
Implementation Steps
Every implementation of ASU 2014-02 will be unique, but
the following steps can be used to assist in designing an
implementation plan:
Step 1: Ensure the entity qualifies to make the election
in ASU 2014-02
• The entity is only eligible to adopt a policy to amortize
Considerations when Adopting ASU 2014-02
goodwill if they do not meet the definition of a public
business entity provided by ASU 2013-14 (see MHM
Messenger 2014-02). Additionally, the option is not
available to not-for-profit entities or employee benefit
plans.
There are various considerations and implementation
questions that arise when considering the accounting
alternative to amortize goodwill. Some considerations may
include:
Step 2: Identify all goodwill existing as of the adoption
date
What are the expected cost savings from adopting the
amortization of goodwill?
The primary savings from adopting goodwill amortization
arises from the removal of the required annual impairment
test. Estimating the cost of performing the test, including
the cost of preparing the test, engaging valuation professionals and the incremental cost of having the impairment
test audited or reviewed are all factors that may lead to
cost savings.
• This includes any goodwill associated with equity
method investments. This may involve reviewing the
original acquisition information to determine the equity
method goodwill acquired on that date.
Step 3: Assign a useful life to the existing goodwill
What are the expectations of the users of the financial
statements?
Owners, lenders, customers or other users of financial
statements may have expectations about the accounting
for goodwill including potential preferences for the new
amortization or the traditional annual impairment testing
models. Discussing these preferences prior to adopting
goodwill amortization will help ensure a smooth transition.
How will the impact of additional amortization expense
impact net income, total assets and equity? Are there debt
or other covenants which are based on these metrics or
ratios that use these metrics?
• Goodwill existing as of the beginning of the period of
adoption should be amortized on a straight-line basis
as of the beginning of the period of adoption (i.e. January 1 for calendar year-end companies). A period of
less than 10 years may be used if an entity can demonstrate a shorter useful life is more appropriate.
Entities electing to use a shorter life should have sufficient analysis to support the useful life assigned, which
will often include:
• Identification of the cash flows specific to the goodwill
• Discussion of the interaction of cash flows specifically identified with the goodwill and other cash
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PAGE 6

7. Step 6: Ensure financial statement presentation and
disclosures are appropriate
generating units of the entity and why they are
included/excluded from the analysis
• How the estimated useful life was determined
• ASU 2014-02 introduces additional disclosure requirements for entities electing to amortize goodwill.
Step 4: Finalize accounting policy election with respect to impairment testing
For more information
• Document the accounting policy to perform the good-
will impairment test at the entity level or retain the current practice of performing the analysis at the reporting
unit level. After making an election, consider whether
there is the existence of a triggering event during the
year of adoption to ensure appropriate recognition,
presentation and disclosures.
If you have any specific questions or concerns regarding
accounting for goodwill, please contact James Comito of
MHM’s Professional Standards Group or your MHM service
professional. James can be reached at 858.795.2029 or
jcomito@cbiz.com.
Step 5: Ensure amortization expense for the year of
adoption is appropriate
• Amortization expense should be calculated as of the
initial day of the financial reporting period and should
consider the timing of any impairment losses recorded
in the year of adoption.
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PAGE 7

8. Substance of the Standard 2014-01 Appendix:
Changes to the Accounting for Goodwill for Private Companies
Summary of Significant Changes
Without the election of ASU 2014-02 With the election of ASU 2014-02
Carrying Amount of Goodwill Not amortized.
Amortized over 10 years, unless a
shorter life can be demonstrated.
The cumulative amortization
period cannot exceed 10 years.
Goodwill amortization applies to all
goodwill, including goodwill associated with an equity method investment.
Goodwill Impairment Test
Annual impairment test using the
three-step process.
Impairment test is performed
when a triggering event occurs.
At the time of a triggering event
a qualitative assessment may
be performed to determine if it is
more likely than not that goodwill is impaired. If the qualitative
assessment indicates goodwill is
more likely than not impaired or an
entity elects to skip the qualitative
assessment, a quantitative analysis is performed to measure the
impairment loss, if any.
Entity (reporting unit)
Impairment test is conducted at the
level of a reporting unit.
An entity must elect to test goodwill at either the entity or the
reporting unit level when goodwill
amortization is first elected.
Measurement of Impairment
Loss
Impairment loss is measured using a
hypothetical purchase price allocation
in which all assets and liabilities of
the reporting unit are measured at fair
value.
Impairment loss is measured using the difference between the fair
value and the carrying value of the
entity or reporting unit.
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PAGE 8