Testing Goodwill for Impairment - Accounting and Valuation Guide
This new guide provides accounting and valuation guidance for impairment testing of goodwill. Specifically, it focuses on practice issues related to the qualitative assessment and the first step of the two-step test.
This resource is a valuable tool for auditors, accountants and valuation specialists seeking an advanced understanding of the accounting, valuation, and disclosures related to goodwill impairment testing (including the qualitative assessment). It is also a vital resource for preparers of financial statements of public and private companies that follow FASB guidance on goodwill.
Covered topics include:
- Fair Value: This guide discusses measuring the fair value of a reporting unit in accordance with FASB ASC 820, Fair Value Measurement, and illustrates the valuation techniques often utilized for this purpose.
- Practice Issues: This guide addresses such issues as identifying reporting units, assigning assets and liabilities to a reporting unit, treatment of shared assets and liabilities among reporting units, assigning recorded goodwill to reporting units, when to test goodwill for impairment, consideration of market participant assumptions, performing comparison to market capitalization, and more.
- New Qualitative Assessment: This guide describes the framework for performing the optional qualitative assessment, and includes an example that illustrates one approach for performing it.
- Comprehensive Example: This guide includes a comprehensive example of a valuation analysis used for performing steps 1 and 2 of the goodwill impairment test. In this example, the discount rate adjustment technique, the guideline public company method, and the guideline company transactions method are used to determine the fair value of a reporting unit. These are the most frequently used methods in practice when determining the fair value of a reporting unit in accordance with ASC 820.
- Disclosures: Provides example disclosures which meet the requirements contained in FASB ASC 350-20, as well as those of Item 303 of SEC Regulation S-K.
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3.01 The primary purpose of this chapter [chapter 3, Qualitative Assessment] is to discuss and illustrate the optional qualitative assessment. This chapter addresses, among other issues, the process of identifying both the inputs and assumptions that most affect fair value and the events and circumstances that may have an impact on those inputs and assumptions. It also includes an example that illustrates one approach for performing the qualitative assessment. The example is intended to illustrate the thought process described in this chapter as opposed to laying out documentation requirements. Other approaches may be acceptable.
4.84 The following sections include a comprehensive example of a valuation analysis used for performing steps 1 and 2 of the goodwill impairment test (for illustration of the qualitative assessment, see chapter 3, “Qualitative Assessment”). In this example, assume that ABC Company (company or ABC) is a U.S. based distributor of nondurable components which operates through two segments, East and West. Each of these segments satisfy the criteria to be defined as reporting units under guidance in FASB ASC 350-20. The company allocates its assets and liabilities to reporting units based on the criteria in FASB ASC 350-20. Some assets and liabilities do not satisfy the assignment criteria and reside on the books of the parent. All goodwill has been allocated to either the East or West Reporting Unit. This example focuses on the East Reporting Unit; amounts for the West Reporting Unit are given.
4.85 The following are additional facts related to this example:
- The PFI was analyzed and discussed with management to confirm that the PFI utilizes market participant assumptions. Adjustments to the PFI are reflective of market participant assumptions.
- Three approaches were considered in determining the fair value of the reporting unit: the income approach, the market approach, and the asset approach.
- Two approaches were used in determining the fair value of the East Reporting Unit: the income approach and the market approach.
- Under the income approach, the fair value of the East Reporting Unit was measured using the discount rate adjustment technique under the DCF method (see schedules 4.1–4.9).
- Under the market approach, the fair value of the East Reporting Unit was measured using the guideline public company method (see schedules 4.10–4.10.2) and the guideline company transactions method (see schedules 4.11–4.11.1).
- The results of measuring the fair value of the East Reporting Unit using the DCF method, the guideline public company method, and the guideline company transactions method were summarized (see schedule 4.12) and compared to external fair value indications (see schedules 4.13-4.14). Based on the facts presented in this example, the fair value of the East Reporting Unit determined in the step 1 test exceeded its carrying amount, therefore eliminating the need to perform the step 2 test.
- In order to illustrate step 2 of the goodwill impairment test, it is necessary that the fair value of the reporting unit be lower than its carrying amount. Accordingly, in this example, the fair value of the East Reporting Unit determined in the step 1 test was altered so that it is no longer greater than its corresponding carrying amount, therefore causing the failure of the step 1 test and requiring completion of the step 2 test (see schedules 4.15-4.16).
- Other assumptions and support are presented within the example.
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