The Financial Accounting Standards Board has issued an exposure draft of a proposed Accounting Standards Update that aims to simplify how an entity is supposed to test goodwill for impairment.

Currently, an entity is required to test goodwill for impairment at least annually 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 must be performed to measure the amount of impairment loss, if any.

With the proposed changes, an entity would be allowed to first assess the qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the proposed amendments, an entity would not be required to calculate 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 proposals include a number of factors to consider in conducting the qualitative assessment.

“Nonpublic companies have expressed concerns to the Board about the cost and complexity of performing the goodwill impairment test,” said FASB member Daryl Buck in a statement Friday. “The proposals contained in this update are intended to address those concerns and to simplify and improve the process for public and nonpublic entities alike.”

If approved, the amendments in the proposed update would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011. Early adoption would be permitted.

The comment period for the proposed update extends through June 6, 2011. The exposure draft is available at For this proposed update, FASB is piloting a new electronic constituent feedback form intended to make it easier to submit comments. The new feedback form is also available at Constituents wishing to provide traditional comment letters via the current process can continue to do so.

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