FASB Eliminates Step 2 from Goodwill Impairment Test
Earlier this year, the Financial Accounting Standards Board (FASB) simplified the accounting for goodwill impairments by issuing ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated Step 2 from the goodwill impairment test.
Under the original guidance, goodwill was required to be tested at least annually for impairment using a two-step process:
- Step 1 - Compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the test is finished. If the carrying amount of the reporting unit exceeds its fair value, go to Step 2 to measure the amount of impairment, if any.
- Step 2 - Determine the current implied fair value of goodwill in the same manner used in a business combination. This means the reporting entity allocates the fair value to all of the assets and liabilities of that entity (including any unrecognized intangible assets) The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. If the implied fair value of the goodwill is less than the recorded amount of goodwill, an impairment loss must be recorded.
Under the new ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The same impairment assessment will apply to all reporting units, and an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
The new standard applies to public business entities and other entities that have not elected the private company alternative for the subsequent measurement of goodwill, which allows nonpublic business entities to amortize goodwill (on a straight-line basis over 10 years or less if the entity demonstrates that another useful life is more appropriate) and perform a simplified impairment test. Public business entities that are not SEC filers should adopt the new standard for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.