FASB Eliminates Step 2 of Goodwill Impairment Test
Companies no longer have to perform the second step of the goodwill impairment test under new guidance issued by the Financial Accounting Standards Board (FASB) on Jan. 26.
Dropping Step 2 simplifies the goodwill impairment test for entities that do not apply the private company accounting alternative for goodwill, the FASB says. The move also addresses concerns from financial statement preparers and accountants that the current impairment test is too costly and complex, and doesn’t add value to the information provided to investors and other financial statement users.
US GAAP requires goodwill of a reporting unit to be tested for impairment at least annually – or more frequently if certain conditions exist.
The one-step approach under Accounting Standards Update (ASU) No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment,which was issued on Thursday, requires goodwill impairment loss to bemeasured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit).
The new guidance eliminates Step 2, which an entity used to measure goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.
“In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination,” the ASU states. “Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.”
The ASU goes on to say that an entity should consider the income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment will apply to all reporting units, and an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary, the FASB says.
The new standard is required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill.
SEC filers should adopt the amendments for their annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019. Public business entities that are not SEC filers should adopt the new standard for their annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2020.
All other entities, including not-for-profits, that are adopting the amendments should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2021.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after Jan. 1, 2017.
In January 2014, the FASB simplified the goodwill impairment testing process for private companies by allowing them to use an accounting alternative to subsequently measure goodwill. A private company that elects the accounting alternative is allowed to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the company demonstrates that another useful life is more appropriate.
If the accounting alternative is used, a private company is required to make an accounting policy decision to test goodwill for impairment at either the company level or the reporting unit level. It also eliminated Step 2 of the goodwill impairment test.