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Simplifying Goodwill
Impairment Accounting
Valuation Vantage
Fall 2016 | 3
On May 12, 2016, the FASB issued a proposed Accounting
Standards Update (“ASU”) under ASC 350 that allows all
companies including public companies and non-profits to use a
goodwill measurement alternative. Comments are required by
July 11, 2016. The FASB will then take into consideration these
comments in making any final changes before issuing the final ASU.
BACKGROUND
The FASB created this proposed ASU to simplify the goodwill
impairment test process for all companies, except for
private companies that already elected the private company
alternative.
1
MAIN PROVISIONS OF NEW PROPOSED ASU
The proposed ASU removes the requirement for a company to
perform a Step 2 goodwill impairment test when it does not pass
a Step 1 goodwill impairment test. A goodwill impairment test
under the proposed ASU also has the following proposed changes:
1. A goodwill impairment test would involve comparing the
fair value of a reporting unit with its carrying amount. An
impairment charge would be recognized for the amount by
which the carrying amount exceeds the reporting unit’s fair
value. However, the impairment charge would never exceed
the carrying amount.
2. A reporting unit with a zero or negative carrying amount
would not be required to perform a qualitative test. Also,
if it performs a qualitative test and fails, the reporting
unit would not be required to perform a Step 2 goodwill
impairment test.
3. A company would be required to disclose the existence
of any reporting units with zero or negative carrying
amounts. The goodwill amounts allocated to those
reporting units would have to be disclosed.
A company still has the option to perform a qualitative
assessment, or Step 0 test, to determine whether a quantitative
impairment test, or Step 1 test, is necessary.
KEY TAKEAWAYS
The proposed ASU does not require a Step 2 goodwill
impairment test, which will save time and costs for companies
that fail a Step 1 test. Specifically, an analysis similar to a
purchase price allocation would not need to be performed to
determine an impairment charge which is currently required
under step 2.
The effective date for the proposed ASU likely will be December
15, 2019 for public companies that file with the SEC and
December 15, 2020 for public companies that do not file with
the SEC. The FASB proposed specific transaction guidance for
private companies that elected the private company alternative
for subsequent goodwill accounting, but that have not adopted
the private company alternative that combines certain intangible
assets with goodwill.
1
The private company alternative does not require the subsequent measurement of goodwill.