The Financial Accounting Standards Board (FASB) recently issued an Exposure Draft regarding proposed changes to goodwill impairment testing. The proposed changes would simplify accounting for goodwill impairment by reducing the annual testing requirements, which currently follow the process below:
Step 1: Compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is required. If the carrying amount exceeds fair value, the entity must complete the second step of the impairment test to determine if an impairment loss is required.
Step 2: Compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities. If the implied fair value exceeds the carrying amount of goodwill, no impairment is necessary. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the difference between the carrying amount and the implied fair value of goodwill, up to the carrying amount of goodwill.
The proposed update would remove Step 2 from the impairment test. The entity instead would perform the annual impairment test by comparing the fair value of a reporting unit to its carrying amount (Step 1 above) and would recognize an impairment loss equal to the difference in the carrying amount and the fair value of the reporting unit. The loss would not exceed the carrying amount of goodwill allocated to the reporting unit.
With the proposed update, the cost and complexity of goodwill impairment testing would be reduced, because entities would no longer be required to calculate the implied fair value of goodwill. Additionally, the proposed update would remove the requirements for reporting units with a zero or negative carrying amount to perform a qualitative assessment. The entity would disclose the existence of reporting units with zero or negative carrying amounts and the amount of goodwill allocated to those reporting units.
The proposed update would be applied on a prospective basis, and the entity would disclose the nature of and reason for the change in accounting principle in the first annual financial statements after the adoption date. Comments and feedback for the proposed update are due July 11, 2016.
If you have questions about the proposed changes, or would like to request a speaker on this topic for your organization or event, contact one of our executives below, (800) 270-9629.