All entities—not just private companies—will soon have a streamlined process for testing for goodwill impairment. The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update 2017-04, Intangibles—Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (ASU 2017-04).
In 2014, the FASB released a private company accounting alternative for the subsequent measurement of goodwill designed to reduce the cost and complexity of performing a goodwill impairment test. After the release of the private company alternative, the FASB added a two-part goodwill impairment initiative to its agenda to determine whether public business entities and not-for-profit organizations would also benefit from a simplification of the goodwill impairment test. ASU 2017-04 marks the completion of phase one. Phase two will examine other potential changes to the subsequent accounting for goodwill, including amortization of goodwill.
The Goodwill Impairment Model
Existing U.S. GAAP requires entities to test for goodwill impairment on an annual basis. A three-part model is used to test for goodwill impairment:
- Step 0: Entities may elect to perform an analysis of qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than the carrying amount of the reporting unit.
- Step 1: If the Step 0 test is not elected or it indicates it is more likely than not that fair value of the reporting unit is less than the carrying amount of the reporting unit, calculate the fair value of the reporting unit and compare its fair value to the carrying value of the reporting unit.
- Step 2: If the results of Step 1 indicate the fair value of the reporting unit is less than its carrying value, determine the implied fair value of goodwill in accordance with ASC Topic 805, Business Combinations. Step 2 results in the fair value of individual assets and liabilities being determined in order to compute the remainder, which is the implied fair value of goodwill. If the fair value of goodwill is less than its carrying value, the difference is the amount of impairment recognized.
The FASB created a private company accounting alternative which reduced the complexity of accounting for goodwill by permitting an election to amortize goodwill. The election to amortize goodwill also included a modified impairment model in which impairment testing was only required when a triggering event occurred.
During deliberations for the private company accounting alternative, the FASB identified that all entities may benefit from a simplification of the impairment model and initiated this project.
Elimination of Step 2 and Other Changes
ASU 2017-04 eliminates Step 2 of the impairment model. Entities will still be required to perform an annual test for goodwill impairment. The annual test will now include an optional qualitative test (formerly Step 0). If the qualitative test is not elected or it indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then reporting entity will perform the quantitative test (formerly Step 1).
Under the revised model, goodwill impairment is recognized when the computed fair value of the reporting entity is less than the carrying amount. The impairment charge is the amount by which the carrying amount exceeds the fair value, but the loss will not be greater than the amount of goodwill allocated to the reporting unit.
Three additional changes to the goodwill impairment model clarify and improve consistency across entities. These changes include:
- Income taxes: When goodwill is tax-deductible, an impairment of goodwill may result in a deferred tax asset or decrease in deferred tax liability. Because deferred taxes are allocated to a reporting unit, the tax effect of the impairment would trigger an additional impairment charge. Therefore, a special calculation is required to determine the final amount of impairment. Referred to as the "simultaneous equation" the computation is described as thus: Tax Rate / (1 – Tax Rate) x Preliminary Impairment.
- Foreign currency translation adjustments: Diversity of practice has existed on whether foreign currency translation adjustments recorded in accumulated other comprehensive income should be allocated to a carrying unit when performing goodwill impairment testing. The revised guidance clarifies that those amounts should not be assigned to the reporting unit.
- Zero or negative carrying amounts: The existing goodwill impairment model required a qualitative impairment test be performed when a reporting unit's carrying value is zero or negative to determine if Step 2 should be applied. To create consistency across all companies, this alternative impairment model was eliminated. An entity with a reporting unit with zero or negative carrying will now apply the same impairment model to determine whether goodwill is impaired and the amount of impairment. In addition, disclosure of the reporting units that have zero or negative carrying amounts and the amount of goodwill allocated to those reporting units will now be required.
Effective Date
Adoption of the revised impairment model will be done prospectively. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers must adopt the goodwill impairment change for impairment tests performed during fiscal years beginning after Dec. 15, 2019 (calendar year 2020). Public business entities that are not SEC registrants must adopt for impairment tests performed during fiscal years beginning after Dec. 15, 2020 (calendar year 2021). All other entities must adopt for impairment tests performed during periods beginning after Dec. 15, 2021 (calendar year 2022). Early adoption is permitted for goodwill impairment tests performed after Jan. 1, 2017. It is not permitted for use in 2016 financial statement reporting.
For More Information
If you have specific comments, questions or concerns about how the changes to goodwill impairment will affect your organization, please contact Mike Loritz of MHM's Professional Standards Group. Mike can be reached at 816.945.5611 or mloritz@cbiz.com.
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