In response to constituent concerns about the cost and complexity of performing the first step of the two-step goodwill impairment test required under Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other, the Financial Accounting Standards Board (FASB) recently issued a Proposed Accounting Standards Update (PASU).
The objective of this PASU is to simplify how an entity is required to test goodwill for impairment. The current guidance under Topic 350 requires an entity to test for goodwill impairment on at least an annual basis by calculating and comparing the fair value of a reporting unit to its carrying amount (Step 1). If the calculated fair value is determined to be less than the carrying amount, then a second step must be performed to measure the amount of the impairment loss, if any (Step 2).
The recently issued PASU introduces a qualitative approach for testing goodwill for impairment whereby an entity would be allowed to first determine whether it was more likely than not (or a likelihood of greater than 50%) that a reporting unit’s fair value exceeds its carrying amount. If this determination can be made, a Step 1 analysis is not required. However, if the qualitative analysis suggests that it is more likely than not that the carrying amount of a reporting unit exceeds its fair value, the entity would be required to perform Step 1 of the two-step impairment test as described above.
In performing the qualitative analysis, an entity should consider all relevant events or circumstances which lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this PASU provide proposed examples of events and circumstances that an entity should consider when performing the qualitative analysis. These examples can be located in ASC paragraph 350-20-35-3C. The proposed amendments also provide improved examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform Step 2 of the impairment test. Under these amendments, an entity would no longer be permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as is currently permitted.
The FASB is currently accepting comments on this PASU and the deadline for comments is June 6, 2011. If passed, the amendments would be effective for reporting periods beginning after December 15, 2011, and early adoption would be permitted. To view the PASU in its entirety, please click here.
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