New Goodwill Impairment Testing Update

11/23/2011

By Ryan Pospeck, CPA

To address concerns about implementing and performing the costly and complex first step of the two-step goodwill impairment test, the Financial Accounting Standards Board recently approved an accounting standard update that attempts to simplify how an entity tests goodwill for impairment.
Previous guidance required at least an annual test of goodwill impairment by comparing the fair value of a reporting unit with its carrying value. If the fair value of the reporting unit was less than the carrying amount, the second step of the process would be completed to measure the amount of impairment loss.

Under the new update, the entity now has the option to first assess qualitative factors to determine whether there have been events or circumstances that have occurred making it more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount. If the entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary.
In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances. The update provides the following examples of events and circumstances to consider:

•  Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
• Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development
• Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
• Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
• Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
• Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
• If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).

This new update is effective for fiscal years beginning after December 15, 2011; however, early adoption is available for the upcoming year-end.