The Financial Accounting Standards Board has approved an updated accounting standard to simplify how an entity should test goodwill for impairment.

The amendments to the previous standards would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity would no longer be required to figure the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance in the revised standard includes examples of the types of factors that should be considered when conducting the qualitative assessment.

Prior to Wednesday’s decision to approve the revised standards, entities were required to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any.

“The board’s decision today comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test,” said FASB member Daryl Buck in a statement. “The amendments approved by the board address those concerns and will simplify the process for public and nonpublic entities alike.”

FASB expects to issue a final Accounting Standards Update in September 2011.The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011, but early adoption will be permitted.

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