A private company accounting alternative for testing goodwill impairment led the Financial Accounting Standards Board (FASB) to reexamine the requirements for goodwill impairment for all entities. A recent proposed accounting standards update would simplify goodwill accounting for all entities not following the private company accounting alternative, including public business entities, not-for-profits and employee benefit plans.

Reexamining the goodwill impairment model began after the release of Accounting Standards Update (ASU) 2014-02 Intangibles and Other (Topic 350) Accounting for Goodwill. The 2014 ASU created an accounting alternative for private companies to amortize goodwill on a straight-line basis over a 10-year period. Private entities that adopt the alternative are only required to test for impairment after a triggering event occurs, rather than on an annual basis.

The discussions on the accounting alternative led the FASB to ask whether the goodwill impairment model should be simplified for all entities. The recent proposed accounting standards update, Intangibles—Goodwill and Other (Topic 350) Simplifying the Accounting for Goodwill Impairment, addresses the first phase of the resulting project.

How Goodwill Impairment Testing Could be Streamlined

In current practice, the goodwill impairment test has three components. A test known as Step 0 is an optional qualitative test to determine whether goodwill is more likely than not impaired. Step 1 is required whenever Step 0 is not performed or it is found that it is more likely than not that goodwill is impaired. Step 1 involves comparing the fair value of the reporting unit to the carrying value of the unit. If the entity finds the fair value is less than the carrying value, the entity moves to Step 2. The second step requires the entity to perform a hypothetical purchase price allocation. The purchase price allocation requires identifying the fair value of the assets and liabilities that compose the reporting unit in the same manner as the acquisition method used in a business combination. After the fair value of the reporting unit has been allocated to all the identifiable assets and liabilities, the remaining value is determined to be the implied fair value of the reporting unit's goodwill. If the implied fair value of goodwill is less than its carrying value, the entity recognizes the difference as an impairment loss.

Under the proposal, the impairment test would be streamlined by eliminating Step 2. Entities would still be required to perform impairment testing annually, but the test would only include the optional qualitative test and the quantitative test, which are formerly Step 0 and Step 1, respectively. Impairment would be measured under the quantitative test as the amount by which the carrying amount of the reporting unit exceeds its fair value. If approved, the proposal would be adopted on a prospective basis.

The proposal would also simplify the impairment testing for reporting units that have a zero or negative carrying value because the book value of their liabilities equals or exceeds the book value of their assets. Under the proposal, these entities would no longer be required to perform a qualitative assessment to test goodwill impairment and would test goodwill for impairment in the same manner as all other entities. Entities with a reporting unit with a negative carrying amount would be required to disclose the existence of the reporting unit and the amount of goodwill allocated to the reporting unit with a negative carrying amount.

Further Discussions

In the proposed ASU, the FASB is asking stakeholders various questions, including whether the Step 2 impairment test should be retained as an option, whether disclosure of the existence of the reporting unit with a negative carrying amount should be required, and whether the existing guidance related to treating deferred income tax considerations when determining the fair value of a reporting unit should be replaced with fair value guidance contained in Topic 820 Fair Value Measurement. Comments on the proposal are due by July 11, 2016.

The FASB is also considering a second phase in the project on the accounting for goodwill. The second phase includes working with the International Accounting Standards Board (IASB) to consider whether alternatives to the existing impairment model for goodwill would be preferable. The Boards are expected to consider switching to an amortization model or making an amortization model for goodwill an option for all entities. As of yet, no decisions have been made on the second phase of the project.

For More Information

If adopted, the proposal is expected to streamline the impairment model for goodwill and reduce cost and complexity for those entities that were previously required to perform Step 2 of the model. In addition to reducing cost and complexity, the change would also impact the accounting outcomes under the impairment test. Under the existing model, some entities failed Step 1 of the impairment test, but after performing the second step determined that they did not have an impairment loss because the implied fair value of goodwill was more than its carrying amount. Those entities would have an impairment loss under the proposal because the carrying amount of the reporting unit is less than its fair value. Other entities that record impairment losses may recognize a different amount of loss under the proposal than that measured under Step 2.

We will keep you up-to-date on developments related to accounting for goodwill. If you have specific comments, questions or concerns, please share them with Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com or 816.945.5614.

Published on May 24, 2016