Update on Testing Goodwill for Impaired

4/28/2011

By Joseph M. Press, CPA, CFE

On Friday, April 22, 2011, the Financial Accounting Standards Board (FASB) issued an Exposure Draft proposing changes to the goodwill impairment test that is intended to simplify how an entity is required to test goodwill for impairment and reduce the related cost. The proposed change would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the current two-step goodwill impairment test.

Current guidance requires an entity to test goodwill for impairment on at least an annual basis by first comparing the fair value of the subject entity with its carrying amount, including goodwill. If the fair value of the entity is less than its carrying amount, the second step of the test must be performed to measure the amount of impairment loss, if any.

Under the proposed change an entity would not be required to calculate the fair value of the entity unless the entity determines based on a qualitative assessment, that it is more-likely-than-not that its fair value is less than its carrying amount. Examples of the qualitative factors include:

• Macroeconomic conditions
• Industry and market considerations
• Cost factors that have a negative effect on earnings
• Overall financial performance such as negative or declining earnings and/or cash flows
• Other relevant entity-specific events such as changes in management, key personnel, strategy or customers
• Events affecting an entity such as a change in the carrying amount of its net assets, and a more-likely-than-not expectation of selling or disposing all, or a portion of an entity

In its current form, the proposed change would apply to all entities, both public and non-public, that have goodwill reported in their financial statements. The proposed changes would be effective prospectively for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early application permitted.

The comment period on this Exposure Draft ends on June 6, 2011.