Press Room: Tax Release
FASB’s Shift to More Qualitative Testing of Goodwill Impairment
Under current U.S. generally accepted accounting principles (GAAP), goodwill is not amortized, but is tested at least annually for impairment. If it is determined that the carrying value of the goodwill exceeds its implied fair value, then impairment exists and a loss must be recognized. The impairment loss is equal to the difference between the implied fair value of the goodwill and its carrying value.
On September 15, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-08 (ASU 2011-08), which amends the testing procedures for determining impairment. Based on the revised rules, companies now have the option of utilizing a qualitative assessment to determine whether further quantitative analysis is required. The quantitative methodology is still permitted and is typically performed by employing an income and/or market approach.
ASU 2011-08 applies to both public and non-public entities that have goodwill on their balance sheets and is effective for annual periods beginning after December 15, 2011; however, early adoption is permitted.
The qualitative assessment determines whether it is more likely than not (i.e., a likelihood of more than 50%) that the fair value is less than its carrying value. If, based on an assessment of qualitative factors, it is determined that the fair value exceeds its carrying amount, then the reporting unit is deemed to have passed the impairment test. Conversely, if this initial qualitative assessment fails to establish that fair value is greater than carrying value, it then becomes necessary to perform the quantitative assessment.
ASC 350 provides the following examples of factors to consider in the qualitative assessment:
- Macro-economic conditions
- Industry and market considerations
- Cost factors
- Overall financial performance
- Relevant events including changes in management, strategy, customers or litigation
- Events impacting the reporting unit including changes in carrying value
- A sustained decrease in share price
The stated purpose of ASU 2011-08 is to reduce the cost and complexity of goodwill impairment testing. However, while the assessment is termed qualitative, certain quantitative analysis and documentation will likely be required to support the concluded assessment. In addition, the reduced cost associated with the qualitative testing may be offset by increased audit fees associated with reviewing the qualitative analysis and associated documentation. Early involvement of an appraiser who has experience in addressing fair value issues may yield savings in terms of time and professional fees.