United States

Goodwill impairment: FASB proposes simplifications

FINANCIAL REPORTING INSIGHTS  | 

On May 12, 2016, the Financial Accounting Standards Board issued a proposed Accounting Standards Update (ASU), Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which would affect the goodwill impairment model applicable to public business entities, private companies that have not elected the private-company goodwill alternative and not-for-profit entities. The proposed ASU would: (a) simplify the measurement of a goodwill impairment charge by 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 (not to exceed the carrying amount of the reporting unit’s goodwill) and (b) result in no goodwill impairment charge when the reporting unit has a zero or negative carrying amount.

The goodwill impairment model includes both a qualitative and quantitative assessment. The proposed ASU does not change an entity’s ability to elect to 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. If the qualitative assessment shows that it is more likely than not that the fair value of a reporting unit is more than its carrying amount, no goodwill impairment charge is recognized. If the qualitative assessment shows that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the entity does not elect to perform a qualitative assessment, then the entity performs a quantitative assessment to determine whether the carrying amount of the reporting unit is greater than its fair value. If that is the case, a goodwill impairment charge is recognized. The proposed ASU would require measuring the goodwill impairment charge as the excess of the reporting unit’s carrying amount over its fair value. However, the goodwill impairment charge could not exceed the carrying amount of the goodwill (i.e., goodwill could not be written down below zero). This proposed change to the goodwill impairment model would eliminate step 2 of the model, which currently requires measuring the goodwill impairment charge by performing hypothetical business combination accounting on the reporting unit (which is often a costly and complex exercise).

If a reporting unit has a zero or negative carrying amount, its goodwill could not be impaired under the proposed ASU given that the fair value of the reporting unit would never go below zero and a fair value of zero is equal to or greater than a zero or negative carrying amount. As a result, the FASB has eliminated the 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, the proposed ASU would require disclosures identifying those reporting units and the amount of goodwill allocated to each.

The proposed ASU does not include an effective date. Consistent with other proposals, the FASB does not discuss effective dates until it has redeliberated the proposal and decided to go forward with a final ASU. If finalized as is, the changes in the proposed ASU would be applied on a prospective basis.

The proposed ASU is available for comment until July 11, 2016.