The New Qualitative Assessments in Goodwill Impairment Testing May Not Be Simple
Goodwill is recognized as an asset on financial statements that results from a business combination. The amount of goodwill that is recognized is the fair value (FV) of the entity that is acquired, less the net of the recognized amounts of the identifiable assets acquired in the combination and of the liabilities assumed. Goodwill is not amortized, but must be tested for impairment under FASB ASC 350, Intangibles — Goodwill and Other at least annually, or more frequently if certain events occur.
The testing of goodwill for impairment can be costly and complex, particularly for privately held entities, many of which often question the need for the recognition of goodwill on the financial statements in the first place. To address these concerns, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment. Under the new ASU, FASB ASC 350, Intangibles — Goodwill and Other, an entity is permitted to qualitatively assess whether the fair value of a reporting unit is less than its carrying amount. The qualitative assessment is sometimes referred to as “step zero.”
Based on the qualitative assessments, if the entity determines that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the entity must perform step one of the goodwill impairment test. However, the entity still has the option to forgo the qualitative assessment and simply perform the step one test. Under the new assessment test, if the entity determines that events and circumstances indicate that its fair value is not less than its carrying amount using a more likely than not criteria (greater than 50 percent), then the original step one test is not required.
Examples of FASB-provided events and circumstances in the new ASU, which would be helpful with the assessment, are:
These examples provided in ASU 2011-08 replace the previous qualitative factors in FASB ASC 350 that entities must currently consider between annual impairment tests and when the carrying amount of a reporting unit is zero or negative. The qualitative factors outlined in ASU 2011-08 are not intended to be all-inclusive. Each factor is not intended to represent stand-alone event or circumstance that would require the entity to perform the first step of the impairment test, but should be taken in consideration with other factors. Also, an entity should consider positive and mitigating events and circumstances that may affect its conclusion.
The ability to utilize qualitative assessments however may not be quite as simple as is first appears. There are a number of issues that an entity must consider when utilizing the qualitative assessments under “step zero.”
The qualitative assessment analysis can make testing goodwill for impairment simpler for those circumstances where it is highly unlikely that goodwill is impaired. However, performing the assessments and documenting conclusions may be more complex than what many preparers of financial information initially thought.
In a concurrent proposal, the FASB introduced an exposure draft of a proposed ASU on January 25 that would extend the qualitative assessment to indefinite lived intangible assets. This proposed ASU will likely have similar aspects as the qualitative assessments for goodwill testing.
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Mark L. Zyla, CPA, ABV, CFA, ASA is managing director of Acuitas, Inc., a valuation and litigation consultancy firm located in Atlanta, Georgia. He is chairman of the AICPA’s Fair Value Conference Committee and provides a workshop for the AICPA on Fair Value Measurements.