Acting on feedback from stakeholders regarding the cost and complexity of measuring goodwill, the Financial Accounting Standards Board (FASB) recently issued a streamlined goodwill impairment test designed to simplify the process.
Under Intangibles—Goodwill and Other (Topic 350), FASB eliminated Step 2 from the existing goodwill impairment test. This step measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. Under the simplified approach, a business can determine annual goodwill impairment by comparing the fair value of a reporting unit with its carrying amount. As a result, goodwill impairment is the amount by which the carrying value exceeds the reporting unit’s fair value, provided that a recognized loss does not exceed total goodwill allocated to that unit. FASB also noted that business entities should determine the income tax effects of any tax-deductible goodwill on the reporting unit’s carrying amount when calculating any impairment loss.
Topic 350 also eliminated the need for a business to perform a qualitative assessment for business units with a zero or negative carrying amount. However, all entities retain the option of performing such a qualitative assessment and, if a reporting unit fails the test, the entity must then perform Step 2 of the goodwill impairment test. FASB noted that all updated amendments under Topic 350 should be applied on a prospective basis, and that the nature of and reason for such accounting change should be disclosed in the first annual or interim period after the transition is made.
The effective date of these amendments for public business entities starts with annual or interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. Public companies that are not SEC filers have until fiscal years beginning after December 15, 2020 to comply, and all private and not-for-profit entities should apply the new amendments in fiscal years beginning after December 15, 2021. Early adoption is permitted for annual or interim goodwill impairment testing that are performed after January 1, 2017.
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February 6, 2017