Accounting & Auditing

New guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts—a consensus of the FASB Emerging Issues Task Force, modifies goodwill impairment testing for reporting units with zero or negative carrying amount. This guidance affects all nongovernmental entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment testing is zero or negative.

Summary of the ASU

Accounting Standards Codification (ASC) Topic 350, Intangibles—Goodwill and Other, provides guidance on a two-step test for goodwill impairment testing. The new guidance within ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity must evaluate whether it is more likely than not that a goodwill impairment exists, regardless of the mathematical results of the Step 1 test. In making that determination, the entity should consider whether there are any adverse qualitative factors that could impact the amount of goodwill. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, including an adverse change in legal factors or in the business climate, unanticipated competition, a loss of key personnel or a more-likely-than-not expectation that all, or part, of a reporting unit will be disposed of.

As a result of this ASU, an entity no longer has the ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This change may result in goodwill impairments being reported sooner than under current practice.

Effective Date

The new guidance is effective for public entities for fiscal years—and interim periods within those years—beginning after December 15, 2010, with early adoption not permitted. For nonpublic entities, the changes are effective for fiscal years—and interim periods within those years—beginning after December 15, 2011. Nonpublic entities may elect to adopt the new guidance early using the effective date for public entities.

As of the January 1, 2011, adoption date for calendar-year public entities, an entity that has a reporting unit with a zero or negative carrying amount is required to assess the goodwill of those reporting units for impairment using the guidance in this ASU. Any resulting goodwill impairment must be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption.

Contact your BKD advisor with questions on how this ASU might affect you.