Proposal to Simplify Accounting for Goodwill Impairment
On May 12, 2016, the Financial Accounting Standards Board (FASB) issued proposed accounting standards update Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The proposal results from recent amendments allowing private companies an alternative for subsequently measuring goodwill. FASB is considering whether similar simplifications to reduce the cost and complexity of goodwill impairment testing should be afforded to all entities. The proposed amendments would simplify the requirements for goodwill impairment testing by removing Step 2 from the impairment test. In a future phase of the project, FASB will consider further changes to the impairment testing methodology and whether to make additional changes to the subsequent accounting for goodwill, including permitting or requiring amortization of goodwill.
Step 2 of the goodwill impairment test encompasses determining the implied fair value (FV) of goodwill and comparing it to its carrying amount. Under current guidance, entities determine the implied FV of goodwill by assigning the FV of a reporting unit to all of its assets and liabilities, including unrecognized assets and liabilities, as if that reporting unit had been acquired in a business combination.
Under the proposed amendments, an entity would perform its annual, or any interim, goodwill impairment test by comparing the FV of a reporting unit with its carrying amount. An entity generally would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s FV—not to exceed the carrying amount of goodwill allocated to that reporting unit. An entity still would have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The amendments would modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied FV to the condition that exists when the carrying amount of a reporting unit exceeds its FV.
The proposed amendments would require all entities to apply the same one-step impairment test to all reporting units, including those with zero or negative carrying amounts. An entity would be required to disclose the existence of any reporting units with zero or negative carrying amounts and the amount of goodwill allocated to those reporting units.
The amendments would apply to all entities reporting goodwill in their financial statements, except private companies that have elected the private company alternative for the subsequent measurement of goodwill. Entities would apply the amendments to eliminate Step 2 from the current goodwill impairment test on a prospective basis. Upon transition, entities would be required to disclose the nature of and reason for the change in accounting principle in the first annual period after the entity’s adoption date and in the interim periods within the first annual period.
FASB will determine the effective date, as well as whether early adoption would be permitted for the one-step impairment test, after considering stakeholder feedback on the proposed amendments. Comments are due by July 11, 2016.