More changes to goodwill impairment testing may be on the horizon. In an October meeting, the Financial Accounting Standards Board (FASB) discussed comments received on its May 2016 exposure draft, which detailed proposed changes to goodwill impairment testing. The FASB also made several decisions that will go into effect with the release of an Accounting Standards Update (ASU).
The main provision of the exposure draft reduces the cost and complexity of the current goodwill impairment test by eliminating a time-consuming step from the test process. The FASB determined that an annual impairment test will be completed first by comparing the fair value of a reporting unit to its carry amount—Step 1 of the test under current requirements. If the fair value exceeds the carrying amount, no impairment or further consideration is required. Under the exposure draft, if the carrying amount exceeds the fair value, then the goodwill is considered impaired, and the impairment loss is equal to the difference between the carrying amount and the fair value, not to exceed the carrying amount of goodwill.
The exposure draft eliminated Step 2 of the impairment test under the current codification. The FASB determined it would require the use of this one-step test on all reporting units—even those with zero or negative carrying amounts—as well as disclosure of the amount of goodwill allocated to such reporting units. The nature and reason for the change in accounting principle also must be disclosed in the first annual financial statements after adoption.
The FASB also determined the effective date of the upcoming standard; the guidance is effective for years beginning after December 15, 2019, for public entities and years beginning after December 15, 2020, for non-public entities. Early adoption is permitted as of January 1, 2017, and prospective application should be used. Formal release of the ASU is expected during the fourth quarter of 2016.
When the FASB initiated the project to simplify subsequent measurement of goodwill earlier in 2016, the project was to be carried out in two phases. The first phase involved the simplification of requirements for testing goodwill for impairment. Future phases of the project included consideration of additional changes to subsequent accounting for goodwill, including permitting or requiring amortization of goodwill, and further changes to the impairment testing methodology. In the October meeting, the FASB elected to suspend deliberations on any future phases of the project while evaluating the effectiveness of Phase 1.
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