The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the goodwill impairment model applicable to public business entities (PBEs) and other entities that have goodwill reported in their financial statements and have not elected the private company goodwill impairment alternative. RSM US LLP recently issued a white paper, Simplifying the test for goodwill impairment, to provide information about various provisions in the ASU as well as the effective date and transition information.
The simplifications provided in the ASU include:
- Eliminating Step 2 from the goodwill impairment model and calculating any impairment charge based 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 required measuring the goodwill impairment charge by determining the fair value of assets and liabilities (including unrecognized assets and liabilities) in the reporting unit. We expect many entities that would be required to perform Step 2 under the existing goodwill impairment model will early adopt the ASU to take advantage of the simplifications.
A PBE that is an SEC filer should adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A PBE that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities that are adopting the amendments, should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.