In September 2011, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08,Intangibles – Goodwill and Other (Topic 350). The amendment to the existing standard is intended to simplify the accounting rules for testing goodwill for impairment.
Accounting Standards Update 2011-08
The current standard requires an entity to test for goodwill impairment, at least annually, using a two-step process. In step one of the test, an entity is required to calculate the fair value of a reporting unit and compare that fair value to the carrying amount of the reporting unit, including goodwill. If the fair value of the reporting unit is less than the carrying amount, then the second step of the test must be completed to determine the amount of the impairment loss, if any.
The ASU reduces the complexity of testing goodwill for impairment by allowing an entity to complete a qualitative evaluation of the likelihood of goodwill impairment to determine whether or not the calculation of the fair value of the reporting unit needs to be completed. Specifically, an entity will have the option of first assessing qualitative factors to determine whether it is more likely than not (meaning a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If after completing the qualitative assessment, an entity determines that it is more likely than not that the fair value of the reporting unit is less than the carrying value, the typical two-step impairment process is required. If the opposite is true, the current two-step impairment process would not be necessary.
The update provides examples of the types of events and circumstances to be considered in the qualitative analysis, some of which are as follows:
- Macroeconomic conditions, such as a deterioration of general economic conditions, limitations on accessing capital, and others
- Industry and market considerations, such as a deterioration in the environment that an entity operates, a change in the market for an entity’s products or services, and others
- Cost factors, such as increases in material, labor or other costs
- Overall financial performance, such as negative or declining revenue and/or cash flows
The examples included are not intended to represent a complete list of the qualitative factors to be considered, rather those factors will need to be determined for individual entities based upon their relative facts and circumstances.
The ASU also includes a change in which an entity will no longer be permitted to carry forward its detail calculation of the fair value of a reporting unit from a prior year as was previously permitted; alternatively, under the new standard, a fair value calculation will be required to be completed in each year in which it is determined to be necessary.
Lastly, the ASU does not change the current standards for the testing of impairment for other indefinite-lived intangible assets.
Who Does the ASU Apply To?
The ASU applies to all entities, both public and nonpublic, that have goodwill reported in their financial statements.
When is the ASU Effective?
The amendments in the ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.