Entities with goodwill from business acquisitions can look forward to some long-requested relief from the cost of performing goodwill impairment testing under a recently released Accounting Standards Update (ASU). FASB has issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment, which amends how an entity measures a goodwill impairment loss by eliminating a step from the annual or interim goodwill impairment test. Under this new ASU, goodwill impairment will be measured by comparing the carrying value of a reporting unit to its fair value and recognizing an impairment loss for the difference, which is limited to the total carrying amount of that reporting unit’s goodwill.
Goodwill is an intangible asset, and from a current accounting perspective, goodwill represents the difference between the cost of a business acquisition and the fair value of its identifiable assets and liabilities. Goodwill impairment is the recognition of a decline in such asset value. Under the FASB’s previous guidance, entities tested for goodwill impairment annually using a three-step model at the reporting unit (an operating segment or one level below an operating segment, also referred to as a component) level:
- Step 0: Entities might first assess qualitative factors to determine if it was more likely than not (greater than 50% likelihood) that the fair value of the reporting unit was less than the carrying amount of the reporting unit.
When an entity bypassed or failed Step 0, the next two steps of goodwill impairment testing would be performed:
- Step 1: Compare the fair value of the reporting unit to its carrying amount to determine if an impairment exists. If the carrying amount of the reporting unit exceeded the fair value of the reporting unit, Step 2 must be applied.
- Step 2: Determine the implied fair value of goodwill in accordance with Accounting Standards Codification Topic 805, Business Combinations, and compare it to the carrying amount of goodwill to measure the impairment loss, if any.
Prior to the release of the new ASU, a company having reporting units with either ZERO or a negative carrying amount could reach the conclusion that the goodwill was not impaired since the fair value of the goodwill is always greater than the carrying amount. The latest ASU addresses this issue, eliminating the requirement for such a company to perform a qualitative assessment to determine whether the Step 2 test must be performed.
The new standard applies prospectively to all existing goodwill and does not change the timing of goodwill impairment. An entity can still perform the Step 0 qualitative test first or go directly to the Step 1 qualitative test.
Public business entities that are U.S. Securities and Exchange Commission (SEC) filers must adopt the goodwill impairment change for impairment tests performed during fiscal years beginning after Dec. 15, 2019 (calendar year 2020). Public business entities that are not SEC registrants must adopt for impairment tests performed during fiscal years beginning after Dec. 15, 2020 (calendar year 2021). All other entities must adopt for impairment tests performed during periods beginning after Dec. 15, 2021 (calendar year 2022). Early adoption is permitted for goodwill impairment tests performed after Jan. 1, 2017. It is not permitted for use in 2016 financial statement reporting.
This new ASU will simplify financial reporting, as it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. The new guidance may also result in more or less impairment being recognized than current guidance.
If you would like more information about this new ASU or testing of goodwill impairment, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.