The Financial Accounting Standards Board decided during a board meeting to add a project on goodwill impairment testing to its technical agenda.
The project will address the level at which goodwill is tested for impairment, and the frequency of the testing. At a meeting last week, FASB staff members told board members about the feedback they had received during outreach to financial statement preparers and recommended eliminating the requirement to test goodwill for impairment annually for all public companies, as well as private companies and not-for-profits that have not elected the amortization accounting alternative. The staff said that eliminating the annual requirement to perform a goodwill impairment test would reduce costs and complexities of the goodwill impairment model for many entities because entities already have processes, internal controls and audit procedures in place to identify and assess triggering events.
They also recommended changing the level of testing goodwill impairment to the operating segment level, and indicated that testing goodwill impairment at the operating segment level would reduce operational complexity and cost. Under current guidance, goodwill is tested at the reporting unit level, which is an operating segment or one level below an operating segment. Some of the outreach participants noted that testing impairment at a more aggregated level could reduce the number of recognized impairment charges. The staff acknowledged that testing goodwill at the operating segment level would reduce granularity and could result in fewer recognized impairments, but still thinks the expected benefits outweigh the expected costs.
They said outreach with preparers indicated that the current reporting unit model imposes significant cost and complexity that many stakeholders view as disproportionate to its incremental and informational value, particularly given the judgment involved in identifying reporting units and performing impairment tests. Testing goodwill at the operating segment level would simplify the model, improving consistency and operability, reduce repair and audit burden, and better align impairments with existing financial reporting structures and how management evaluates performance, while continuing to provide users with decision-useful information. In addition, many investors stated that quantitative impairment amounts are generally excluded from financial analysis models. Therefore, the staff thinks the expected benefits of this change are likely to justify the expected costs. The staff also recommended the change apply to all entities, including private companies and not-for-profits that elect the goodwill amortization accounting alternative.
FASB chair Richard Jones noted that FASB previously gave private companies the option to do entity-level testing, which is already at a higher level, and in 2021, also gave private companies the chance to only look for indicators at the balance sheet date or reporting date so they don't have to look at the indicators on an interim basis.
"Usually, there's a robust set of disclosures around goodwill and impairment testing when it's close," said Jones. He noted that many disclosures are already in the management discussion and analysis. "
"And then all companies, just as a refresher, when you do impairment testing, you have to first evaluate individual assets for impairment on your inventory, your long-lived and indefinite-lived intangibles. Then you go to an asset group impairment testing for long-lived assets, and then you go to goodwill impairment testing at a different level, which today is the reporting unit, but which if we did this change would be the operating segment, so there are already different levels of impairment testing today."
FASB vice chair Hillary Salo noted that it would be helpful to get additional feedback from practitioners. "I will tell you from a practice perspective, getting down to the reporting level and getting to that level of granularity takes significant time and effort, and I haven't seen management using that for purposes of allocating resources," she said. "I certainly would support moving that level of testing up to the operating segment level."
With regard to the frequency of the goodwill impairment testing, she agreed there are significant costs associated with doing an annual impairment test. "When I think of the time and energy that goes into that, especially for reporting units that have significant headroom, we can all say that maybe that much time shouldn't be spent on an annual impairment test," said Salo.
