The Financial Accounting Standards Board is proposing to simplify the test for goodwill impairment for public companies and nonprofits similar to recent accommodations it made for private companies.
FASB issued an exposure draft of the accounting standards update Thursday, asking for comments on the proposal by July 11. FASB amended its standards in 2013 to allow private companies an alternative accounting treatment for subsequently measuring goodwill in response to input from its sister organization, the Private Company Council (see FASB Endorses Changes in Accounting Standards for Goodwill and Interest Rate Swaps).
FASB decided the amendments were needed because of concern from privately held companies and their stakeholders about the cost and complexity of the current goodwill impairment test. FASB then added a project to its agenda in 2014 to determine whether similar amendments should be considered for other entities, including public traded companies and not-for-profits (see FASB Looks into Simplifying Goodwill Standards for Public Companies).
According to the exposure draft document, FASB said it subsequently separated the project into two phases. The objective of Phase 1 of the project, which resulted in the proposed update, is to simplify how an entity is required to test goodwill for impairment by removing Step 2 from the goodwill impairment test.
In a future phase of the project, FASB plans to consider whether to make additional changes to the subsequent accounting for goodwill, including consideration of permitting or requiring amortization of goodwill, and possibly further changes to the impairment testing methodology.
The proposed changes would apply to all entities that have goodwill reported in their financial statements except private companies that have elected the private company alternative for the subsequent measurement of goodwill.
To simplify the subsequent measurement of goodwill, FASB is proposing to remove Step 2 from the current goodwill impairment test, which includes determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity needs to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in a purchase price allocation for an acquired business.
Instead, under the proposed changes, an entity would perform its annual, or any interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity generally would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, that amount should not exceed the carrying amount of goodwill allocated to that reporting unit. An entity would still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
FASB is also proposing to remove the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment would apply to all reporting units. An entity would be required to disclose the existence of any reporting units with zero or negative carrying amounts and the amount of goodwill allocated to those reporting units.
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