There have been a number of amendments made to goodwill impairment accounting guidance issued by the Financial Accounting Standards Board (FASB) over the past several years. While these amendments are aimed at simplifying accounting for goodwill, care should be taken when navigating their adoption and application. Select recent amendments include the following Accounting Standards Updates (ASUs):
- ASU 2021-03, “Accounting Alternative for Evaluating Triggering Events” (March 2021)
- ASU 2019-06, “Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities” (May 2019)
- ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (January 2017); Effective dates were amended in ASU 2019-10 (November 2019)
A noteworthy change to accounting for goodwill is the elimination of Step 2 of the quantitative goodwill impairment assessment, which was codified through ASU 2017-04 (please see below regarding effective dates). Prior to the adoption of those amendments, a reporting entity performs Step 2 by comparing the carrying amount of goodwill to its implied fair value. Determining the implied fair value of goodwill entails (a) determining the fair value of the respective reporting unit; and (b) assigning the fair value of the respective reporting unit to the assets and liabilities of that reporting unit. The implied fair value of the reporting unit equals the excess of the fair value described in (a) over the fair values assigned in (b). Performing the quantitative assessment in Step 2 can be time-consuming for preparers and auditors alike, as it entails performing hypothetical purchase accounting similar to what is required under Topic 805, “Business Combinations.”
The elimination of Step 2 through the amendments in ASU 2017-04 simplifies the quantitative goodwill impairment assessment by removing the requirement to determine the implied fair value of reporting unit goodwill. Accordingly, a reporting entity applying these amendments will determine the fair value of a reporting unit but will not be required to perform the often time-consuming and complex exercise of assigning such fair value to the reporting unit’s assets and liabilities. After adopting these amendments, a reporting entity will perform the quantitative goodwill impairment assessment by comparing the fair value of the reporting unit to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, then the respective reporting unit goodwill is considered impaired and a goodwill impairment loss is recognized in that year’s income statement or equivalent, but such impairment loss will not exceed the pre-impairment carrying value of the goodwill.
The following summarizes a reporting entity’s evaluation of goodwill for impairment upon adoption of these amendments.
Step 0 – An optional qualitative goodwill impairment assessment that provides greater flexibility by allowing a reporting entity to “assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill,” as stated in ASU 2017-04. If, after qualitatively assessing the goodwill for impairment, the reporting entity determines that it is more likely than not that fair value of a reporting unit is greater than its carrying amount, then there is no impairment charge to be recorded, and thus no need to proceed to Step 1. Otherwise, a reporting entity would proceed to Step 1. It should be noted that a reporting entity has “an unconditional option” to bypass this qualitative assessment and proceed directly to the quantitative goodwill impairment assessment in Step 1.
Step 1 – A quantitative assessment that requires a comparison of the fair value of the reporting unit to the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, then the goodwill is considered impaired and a goodwill impairment loss is recognized in the current year’s income statement or equivalent, but only to the extent of the pre-impairment carrying value of the reporting unit’s goodwill.
Another noteworthy change relates to reporting units with a carrying value of zero or less than zero. Previously, a reporting unit with no or a negative carrying value performed a qualitative assessment) and, if the reporting entity determined that it was more likely than not that a goodwill impairment existed, it was required to skip Step 1 and go directly to Step 2. The elimination of Step 2 and other provisions of ASU 2017-04 allow a reporting entity to evaluate goodwill for impairment in the same manner whether the reporting unit has a carrying value that is zero or less than zero or a positive carrying value.
ASU 2017-04 is effective for annual and interim impairment tests performed for periods beginning after:
- Dec. 15, 2019, for public business entities that are SEC filers, excluding entities eligible to be smaller reporting companies (SRCs)
- Dec. 15, 2022, for all other entities
- Early adoption is permitted.
Reporting entities should use judgment as they consider the timing of adopting these amendments. We are here to help management navigate the various nuances as they apply these amendments to the goodwill impairment accounting guidance.
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