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and positive evidence shall be com- Effect of the TCJA
While objective mensurate with the extent to which it Several years after FASB issued ASU
can be objectively verified.”
No. 2014-02, the law known as the
evidence should As discussed below, assessing the Tax Cuts and Jobs Act (TCJA), P.L.
certainly be given need for a valuation allowance requires 115-97, was enacted. The TCJA modi-
more weight in careful professional judgment. fied the net operating loss (NOL) rules,
providing that NOLs generated after
assessing the need Impact of private company Jan. 1, 2018, can now be carried forward
for a valuation goodwill alternatives (FASB ASU indefinitely but can offset only 80% of
2014-02)
taxable income in the year of utilization.
allowance, ultimately, In 2014, FASB issued Accounting Indefinite-lived DTLs serve as a source
there is no alternative Standards Update (ASU) No. 2014-02, of income to support the realization of
Intangibles — Goodwill and Other
these NOLs. With certain NOLs now
to professional (Topic 350), outlining the private being indefinite, indefinite-lived DTLs
judgment. company alternative for goodwill that have the effect of reducing the amount
allows nonpublic companies to elect to of valuation allowance required with
amortize goodwill on a straight-line regard to indefinite-lived DTAs, while
a cumulative loss is not a bright-line basis over 10 years, or less than 10 the 80% limitation on utilization has
test, a company with pretax losses has years if the company demonstrates that resulted in companies’ needing to care-
a significant piece of negative evidence. another useful life is more appropriate. fully schedule the reversal of existing
While the term “recent years” is not The private company alternative for DTLs and DTAs to determine how
defined, most practitioners define this goodwill significantly reduces the cost the limitations under the TCJA affect
as the three-year period including the and complexity for financial statement the amount of realization supported by
current-year results. preparers. While it also reduces net DTLs. While the scheduling exercise
Evaluating cumulative earnings or income due to the expense resulting and the evaluation of cumulative losses
losses is only one piece of evidence; from the amortization of goodwill, are mechanical, projecting future taxable
companies must analyze all negative for nonpublic companies making this income requires significant amounts of
and positive evidence to determine election, the reduction in net income professional judgment.
whether a valuation allowance is need- may not be all that impactful from the
ed. The guidance in ASC Paragraph perspective of the users of the financial An example
740-10-30-18 identifies four possible statements. The private company alter- For private companies that have
sources of taxable income that may be native for goodwill also indirectly af- elected the private company alterna-
available under the tax law to support fects a company’s income tax provision. tive for goodwill, careful examination
the realization of DTAs: Prior to the private company of expected future results is necessary
■ Future reversal of existing taxable alternative for goodwill, deferred tax to determine whether a valuation allow-
temporary differences; liabilities (DTLs) resulting from tax- ance is required. Consider the following
■ Future taxable income exclusive of deductible goodwill were considered example, which illustrates the need to
reversing temporary differences and indefinite. For companies with a valu- exercise professional judgment:
carryforwards; ation allowance, an indirect effect of
■ Taxable income in prior carryback adopting the private company alterna- Example: As of Dec. 31, 2022, a
year(s), if carryback is permitted tive was a reduction in the amount private company preparing calendar-
under the tax law; and of valuation allowance required as a year financial statements has a three-
■ Tax planning strategies. result of goodwill being converted year cumulative pretax book loss
If one or more sources are sufficient from an indefinite-lived asset to a of $30 million and is in an overall
to support realization of a company’s definite-lived asset. For companies DTA position, with positive pretax
DTAs, the company does not need that amortize goodwill, DTLs created book income before amortization.
to consider the remaining sources. In by the amortization of goodwill for tax The company was acquired in a tax-
considering the weight of available evi- purposes are now considered reversing able acquisition at the beginning of
dence, the guidance in ASC Paragraph DTLs and provide a source of income 2020, resulting in a tax basis step-up,
740-10-30-23 states: “The weight to support the realization of revers- including tax-deductible and book
given to the potential effect of negative ing DTAs. goodwill of $600 million. Under the

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