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Early Adoption Available for New Simplified Goodwill Impairment Test

New standard issued by the FASB expected to simplify goodwill impairment testing and reduce costs

In September 2011, the FASB amended Accounting Standards Codification Topic 350- Goodwill and Other which significantly affected how Companies are required to test goodwill for impairment. Companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on a qualitative assessment, that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount. The revised standard includes examples of the types of qualitative factors that should be considered including, but not limited to, such factors as macroeconomic conditions (e.g. changes in economic conditions, access to capital and foreign exchange volatility), increased competition, growing costs, a decline in financial performance and/or stock price, changes in key personnel and contemplation of bankruptcy or litigation.

The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted provided the Company has not yet issued their financial statements for the period that includes the annual impairment test.

Prior to issuance of this amended standard, Companies were required to perform step one of the impairment test in which the fair value of the reporting unit was compared to its carrying value to identify any potential impairment. If the fair value was less than the carrying value then step two of the analysis was required to determine the amount of the impairment loss, if any. Companies now have the option to assess qualitative factors to determine whether it is necessary to perform the first step of the two-step goodwill impairment test. It is highly recommended that Companies clearly document the results of their qualitative analysis if the two-step quantitative test is bypassed. Instead of performing the qualitative assessment, they may also elect to proceed directly to the first step of the goodwill impairment test. They can make this election for any of their reporting units, in any period, while still having the option to perform the qualitative assessment in subsequent periods.

If the Company has a recent fair value calculation for their reporting unit, the results should be considered when reaching a conclusion about whether to perform the first step of the impairment test. For example, a Company may decide to perform the qualitative analysis if, based on recent calculations, the reporting unit’s fair value was much greater than its carrying amount and there had been no significant adverse factors since the calculations were performed. The amended standard, however, specifically disallows companies from carrying forward the results of fair value calculations from a prior year when performing a quantitative analysis of impairment.

Recent questions have arisen on whether it is more appropriate to use an equity approach (value attributable to equity holders only- also known as “market capitalization”) or enterprise approach (sum of the fair value of equity, plus debt, excluding liabilities-also known as the “business enterprise value”) to determine the fair value of the reporting unit when step one of the impairment test is necessary. This amended standard does not require or give preference to use of either the equity or enterprise approach; however, whichever approach is chosen should be used consistently.

Although the amendment is applicable only to impairment testing related to goodwill, the FASB has added a separate project on its agenda to discuss possible change to the impairment testing for indefinite-lived intangible assets. In addition, the AICPA Impairment Task Force is currently developing an AICPA Practice Aid to address issues related to goodwill impairment testing.

The LSC Group LLC has considerable experience assisting companies with impairment testing. We have developed our professionals to become knowledgeable in valuation techniques as well as in the standards that embody those fair value measurements. Not only are we CPA’s, but we have chosen the Certified Valuation Analyst certification, sponsored by the National Association of Certified Valuation Analysts, for our professional certification standard related to our valuation services. We can assist you with your determination of whether an equity or enterprise premise is more appropriate in your circumstances and we can help you prepare the goodwill impairment analysis.  Please feel free to call us at (813) 254-2500 for questions pertaining to your goodwill impairment testing.