FASB Proposal Would Simplify Goodwill Impairment Testby
A proposal issued by the Financial Accounting Standards Board (FASB) on May 12 would simplify accounting for goodwill impairment.
Under the proposed Accounting Standards Update (ASU), Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, Step 2 would be eliminated from the current goodwill impairment test, which “should reduce the cost and complexity of evaluating goodwill for impairment,” according to the FASB.
An entity currently uses Step 2 to calculate the implied fair value of goodwill and compare it with the carrying amount of that goodwill.
“In computing the implied fair value of goodwill under Step 2, an entity must 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 a purchase price allocation for an acquired business,” the proposed ASU states.
Under the proposed amendments, an entity would perform its annual or any interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
“An entity generally would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value,” the proposed ASU states. “However, that amount should not exceed the carrying amount of goodwill allocated to that reporting unit. An entity would still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.”
In addition, the proposal would remove the requirement that any reporting unit with a zero or negative carrying amount perform a qualitative assessment and, if it fails that qualitative test, perform Step 2 of the goodwill impairment test.
“Therefore, the same impairment assessment would apply to all reporting units with zero or negative carrying amounts and the amount of goodwill allocated to those reporting units,” the proposed ASU states.
How would these proposed changes simplify financial reporting? Because they would eliminate the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment, according to a PwC In Brief on the potential rule changes.
“The amount of impairment recognized under the proposal could be larger or smaller than today, largely depending on the difference between the carrying value and fair value of certain long-lived assets,” the In Brief states. “For example, an entity with significant unrecognized intangible assets or significantly appreciated assets may recognize smaller impairment, whereas an entity with significant property, plant, and equipment with carrying amounts in excess of fair value may recognize larger impairment than today. Additionally, while some companies may recognize no impairment today, even when they fail Step 1, under the proposal, those companies would have to recognize some impairment amount.”
Comments on the proposal should be submitted to the FASB by July 11. Instructions on how to submit comments can be found in the exposure draft.
The current proposal is the first phase of a broader project. In the second phase, the FASB plans to work with the International Accounting Standards Board to consider whether additional changes to the subsequent accounting for goodwill should be made.