Goodwill Testing Revised

In August 2011, the Financial Accounting Standards Board (FASB) approved the issuance of an Accounting Standard Update that simplifies and should reduce the cost and complexity of performing goodwill impairment tests.

Prior to this update, companies were required to test goodwill for impairment on at least an annual basis through a two-step “quantitative” process:

  • The first step (and arguably the most expensive) required companies to determine the fair value of the reporting unit (entity).  In many cases, companies were required to obtain a business valuation or complete a complex valuation model to substantiate the fair value.  The fair value was then compared to the book value/carrying value of the reporting unit which includes the value of goodwill.
  • If the fair value of a reporting unit was less than its carrying amount, the second step of the test was to measure the amount of impairment on the underlying goodwill.

The new standard allows companies to use an initial “qualitative” approach before any “quantitative” analysis is required.  During this initial step, management should review qualitative factors to assess whether it is “more likely than not” (50%/50%) that the carrying value of the reporting unit is less than the fair value.  If the analysis shows that the fair value is NOT less than then the reporting unit’s carrying value, the company is not required to perform the “quantitative” process as described in steps 1 and 2 above.  Some practitioners are calling this qualitative analysis “step -0-.”

The guidance in the new standard includes examples of the types of factors that should be considered and documented when conducting the “qualitative assessment.”  Some of these factors include macroeconomic conditions, industry and market conditions, cost factors, financial performance, entity specific considerations and others.

The update is effective for annual and interim goodwill impairment testing performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.

If you have any questions about this, please contact your Meaden & Moore representative or John Nicklas at (216) 241-3272 or jnicklas@meadenmoore.com.