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Testing Goodwill for Impairment - Accounting and Valuation Guide
This new guide provides practical guidance and illustrations related to the qualitative assessment and the first step of the two-step goodwill impairment test.

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Product details

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 mor.
  • New Qualitative Assessment: This guide describes the framework for performing the optional qualitative assessment, and includes an example that illustrates one approach for performing i.
  • 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.

Discounts

FVS Section Members and CGMA designation holders qualify for an additional 10% discount on this product. In order to receive your special pricing, you must be registered and signed in. Should you have any questions or encounter any issues, please contact the AICPA Service Center at 888-777-7077 or service@aicpa.

Find out more information on the Forensic and Valuation Services Member Section.

Excerpt

Excerpt 1

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.

Excerpt 2

Comprehensive Example

Overview

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:

  1. 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.
  2. Three approaches were considered in determining the fair value of the reporting unit: the income approach, the market approach, and the asset approach.
  3. Two approaches were used in determining the fair value of the East Reporting Unit: the income approach and the market approach.
  4. 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).
  5. 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).
  6. 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.
  7. 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).
  8. Other assumptions and support are presented within the example.

 

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American Institute of CPAs

The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with more than 418,000 members in 143 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting.

The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialized credentials for qualified professionals who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. With The Chartered Institute of Management Accountants (CIMA), it offers the Chartered Global Management Accountant (CGMA) designation, which sets the global benchmark for quality and recognition in management accounting.

The AICPA and CIMA also make up the Association of International Certified Professional Accountants (the Association), which represents public and management accounting globally, advocating on behalf the public interest and advancing the quality, competency and employability of CPAs, CGMAs and other accounting and finance professionals worldwide.

The AICPA maintains offices in New York, Washington, DC, Durham, NC, and Ewing, NJ.

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