FASB Approves Simplification Of Goodwill Impairment Testing

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At its board meeting yesterday, FASB approved an amendment to its standards which will simplify testing for goodwill impairment. According to FASB's press release, the Accounting Standards Update, expected to be issued in September, will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption will be permitted.

Amendment Suggested By Private Cos; Will Be Available To All Cos.
FASB Board Member Daryl Buck, who joined the board earlier this year with a wealth of private company experience, including, most recently, as SVP and CFO of Reasor's Holding Company, explained in FASB's press release:

The Board’s decision today comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test. The amendments approved by the Board address those concerns and will simplify the process for public and nonpublic entities alike.

Qualitative Assessment

To simplify the goodwill impairment test, a qualitative assessment will be permitted to determine if the two-step quantitative goodwill impairment test is needed. As further described in FASB's press release (reformatted to bullets):

  • An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.
  • The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment.
  • Prior to today’s decision, entities were required to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any.

The goodwill testing simplification approved by FASB yesterday, emphasizing what some would view as a principles based, qualitative approach with example factors to consider, aims at reducing unnecessary complexity in financial reporting. If you haven't seen it, check out our 'music video' on this subject.



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