Accounting Standards Updates

Dustin M. Wehman, CPA

The Financial Accounting Standards Board (FASB) issues multiple Accounting Standard Updates (ASU) every year. Below are summaries of important updates that may affect the financial reporting for your business.

Testing Goodwill for Impairment (ASU 2011-08)
The cost and complexity of performing the two-step goodwill impairment test has proved burdensome to some entities. The FASB has issued this update to simplify the impairment testing for goodwill. Entities will now be able to assess qualitative factors to determine whether impairment may exist. The entity will only be required to calculate the fair value of a reporting unit if it determined that it is more likely than not that the entity’s fair value is less than its carrying value. The amendment is effective for periods ending after December 15, 2011. A related update (ASU 2010-28)  addresses testing for goodwill impairment when the carrying value of a reporting unit is zero or negative. Entities may no longer assume that impairment does not exist due simply to the fact that the fair value of such a reporting unit is likely greater than zero, as qualitative indications of impairment may still exist. An entity should evaluate whether it is more likely than not that goodwill is impaired, and perform step two of the goodwill impairment test, if applicable. This amendment is also effective for periods ending after December 15, 2011.

Health Care Entities (ASU 2011-07)
In an effort to improve the transparency of a health care entity’s net patient service revenue, and improve the comparability between these types of entities, the FASB has issued this update which changes the presentation of the provision for bad debts. Previously, the provision for bad debts would be included in the income statement as an operating expense. The new presentation will show the provision for bad debts as a direct reduction of patient service revenue. In addition, an enhanced disclosure concerning a health care entity’s revenue recognition and bad debt accounting policies will be required. For nonpublic entities, the new presentation and disclosure requirements are effective for periods ending after December 15, 2012, with early adoption permitted.

Other Comprehensive Income (ASU 2011-05)
Currently, U.S. Generally Accepted Accounting Principles allows three methods for presenting other comprehensive income (OCI) in the financial statements: an entity may disclose (1) total comprehensive income (i.e. net income and OCI) as one continuous statement; (2) two separate, but consecutive statements; or (3) OCI as a part of the statement of changes in stockholders’ equity. This amendment eliminates option three. In addition, reclassifications of items between OCI and net income will be required to be presented on the face of the financial statements. For nonpublic entities, these requirements are effective for periods ending after December 15, 2012, with early adoption permitted.

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