With digital cameras, taking a photograph is typically a simple process with two steps: point and shoot. Another two-step process – according to a recently issued mandate from the Financial Accounting Standards Board (FASB) – is the goodwill impairment test. The FASB’s new goodwill impairment standard eliminates Step 2 of the test, thereby reducing the cost and complexity of the procedure.
A Picture of Existing Goodwill Impairment Requirements
Current impairment guidance provides entities with an option (known as “Step 0”) to assess qualitative factors to determine whether a quantitative impairment test is necessary. Step 0’s assessment of qualitative factors addresses if it is more likely than not that the reporting unit’s fair value is greater than its carrying value. If an entity fails or elects to bypass Step 0, then it performs a two-step quantitative impairment test.
- Step 1 compares a reporting unit’s fair value to its net equity, or carrying amount, to determine if impairment exists (i.e., Step 1 is currently the recognition trigger).
- Step 2, if needed, compares the implied fair value of reporting unit goodwill with the actual carrying amount of goodwill (i.e., Step 2 is the measurement trigger). The implied fair value of goodwill:
- is calculated in the same manner as the goodwill recognized in a business combination (i.e., by performing a purchase price allocation for an acquired business), and
- represents the excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities.
Putting the New Goodwill Impairment Standard into Focus
The new standard simplifies the subsequent measurement of impairment by removing the existing Step 2. Upon adoption, an entity will begin its annual impairment with the Step 0 qualitative assessment. If Step 0 is failed or bypassed, then the entity will compare the fair value of the reporting unit with its carrying amount (Step 1). If the fair value is less than the carrying amount (including recorded goodwill), then the difference represents the impairment loss. Any recognized impairment loss is capped at the amount of the goodwill allocated to the reporting unit. Step 1 of the impairment test now becomes the trigger for both the recognition and the measurement of the impairment loss.
If an entity has tax deductible goodwill included in its carrying amount, the new regulations include guidance on how to calculate the impairment as it relates to deferred tax assets and liabilities. Entities with reporting units having zero or negative carrying amounts are required to perform the same assessment that other entities conduct. Those entities also have to disclose reporting units that have zero or negative carrying amounts and the amount of goodwill allocated to them.
CRI Can Give You a Snapshot of Goodwill Impairment Changes on the Horizon
The FASB’s new standard, which is applied prospectively, is effective for SEC filers for any impairment tests performed by calendar-year entities in 2020. Non-public calendar year entities have until 2022 to apply the provisions. Please contact the professionals at CRI if your team has questions regarding its accounting for goodwill. We would be happy to help you capture your procedures from the right “angle” to comply with FASB regulations.