United States

FASB agrees to simplify the goodwill impairment model

FINANCIAL REPORTING INSIGHTS  | 

On November 30, 2016, the Financial Accounting Standards Board (FASB) agreed to draft a final Accounting Standards Update for vote by written ballot that will simplify the goodwill impairment model applicable to public business entities (PBEs), private companies that have not elected the private-company goodwill alternative and not-for-profit entities. These simplifications include:

  • Eliminating step 2 of the goodwill impairment model and basing the impairment charge on the excess of the carrying amount of the reporting unit over its fair value (net of any related tax effect), not to exceed the carrying amount of the reporting unit’s goodwill
  • Recognizing no goodwill impairment charge when the reporting unit has a zero or negative carrying amount

The elimination of step 2 from the goodwill impairment model removes the cost and complexity often associated with that step, which requires measuring the goodwill impairment charge by performing hypothetical business combination accounting on the reporting unit. This simplification does not affect an entity’s ability to first perform a qualitative assessment of whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.

These simplifications will also eliminate the current requirement to perform a qualitative assessment of whether goodwill is impaired when the reporting unit has a zero or negative carrying amount. However, if an entity has one or more reporting units with negative carrying amounts, it will be required to identify those reporting units in its disclosures and provide the amount of goodwill allocated to each.

The FASB also decided to provide guidance regarding the treatment of deferred taxes when applying the private-company goodwill impairment alternative.

The changes to the goodwill impairment models will be applied on a prospective basis and will have the following staggered effective dates:

  • Filers (as defined) with the Securities and Exchange Commission (SEC): Fiscal years beginning after December 15, 2019, including interim periods within those years (January 1, 2020, for calendar year-end entities)
  • PBEs (as defined) other than SEC filers: Fiscal years beginning after December 15, 2020, including interim periods within those years (January 1, 2021, for calendar year-end entities)
  • All other entities: Fiscal years beginning after December 15, 2021, including interim periods within those years (January 1, 2022, for calendar year-end entities)

All entities will be permitted to adopt the changes to the goodwill impairment models as early as January 1, 2017. The practical implications of this for an entity with a calendar year end is that it will not be able to early adopt the changes in its 2016 financial statements. Entities will apply the changes on a prospective basis, for which certain disclosures will be required. Additional transition guidance will be provided for those private companies that have elected the private-company goodwill impairment alternative, but choose to adopt the simplified goodwill impairment model applicable to PBEs.