Goodwill Impairment Testing Just Got Easier
In January, the Financial Accounting Standards Board (FASB) issued new guidance that simplifies goodwill impairment testing.
Accounting Standards Update (ASU) No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, eliminates Step 2 from the quantitative goodwill impairment test. Before adopting this ASU, there are a few things that an entity should consider.
Under the new guidance, entities determine the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying value (referred to as Step 1 of the goodwill impairment test under previous guidance). If the carrying value exceeds the fair value, that difference is recognized as a goodwill impairment loss. This loss, however, is capped at the total amount of goodwill that is allocated to the reporting unit. An entity cannot recognize an impairment loss that exceeds the amount of goodwill in the reporting unit.
Under previous guidance, if an entity failed Step 1 of the impairment test, it didn’t necessarily mean that the entity recorded an impairment loss under Step 2. Under the new guidance, however, failing this test always leads to impairment. As a result, the number of goodwill impairment charges will likely increase under the new standard. Entities in this scenario may also be subject to an interim impairment test in the period of adoption because an impairment indicator exists.
ASU No. 2017-04 also eliminates the qualitative assessment of goodwill for reporting units with a zero or negative carrying value. As a result, all reporting units follow the same one-step impairment model. No goodwill impairment charges will be recorded for reporting units with a zero or negative carrying value. If an entity has a reporting unit with a zero or negative carrying value, however, it is required to disclose that fact, along with the balance of goodwill that is allocated to that unit.
The FASB noted that the one-step impairment model may lead to some reporting units not recognizing a goodwill impairment that may qualitatively be viewed as impaired (such as those with a zero or negative carrying value). Alternatively, this model may also lead to some reporting units recognizing goodwill impairments for impairments of assets other than goodwill that belong to the reporting unit.
Like most standards, the ASU has different effective dates for public and private entities. The standard includes special transitional provisions for private companies based on whether accounting alternatives have been adopted. The FASB anticipates that the guidance in ASU No. 2017-04 will be quick to implement; however, entities may want to carefully consider the timing of implementing the standard.
An entity that is required to perform Step 2 of the impairment test may be inclined to adopt the guidance in ASU No. 2017-04 early. However, it should carefully consider the effects of adopting ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, prior to determining if it will adopt ASU No. 2017-04 early.
The FASB aligned the effective dates of these two standards to address concerns that adopting the new goodwill guidance prior to the credit loss standard could result in double counting an impairment charge. Because an entity now compares the fair value and carrying value of a reporting unit as a whole, an entity may record a goodwill impairment loss that relates to a drop in the fair value of assets other than goodwill in a reporting unit, including a current expected credit loss on a loan. The entity may then also be required to record an impairment charge on the loan upon adopting ASU No. 2016-13.
SAB Topic 11.M (previously known as SAB 74) requires a US Securities and Exchange Commission registrant to disclose the effects that ASU No. 2017-04 is expected to have on its financial statements upon adoption. If a registrant does not know or cannot reasonably estimate the effects that ASU No. 2017-04 will have on its financial statements, the registrant must also consider providing the following qualitative disclosures:
- If determined, a description of the effect of the accounting policies that the entity expects to apply.
- A comparison of the new policies to entity’s current policies.
- The status of an entity’s adoption of the accounting standard and the implementation matters that it has not yet addressed.
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Mandi Polick, CPA, is the managing editor of the GAAP Reporter product with Thomson Reuters Checkpoint with the Tax & Accounting business of Thomson Reuters. She is a CPA in both the state of New York and the state of Iowa. Mandi has nine...