Goodwill impairment testing when carrying amount is trending downward
FINANCIAL REPORTING INSIGHTS |
The goodwill impairment guidance within Section 350-20-35 of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) describes the models that must be used to recognize and measure a goodwill impairment loss. One model is applicable to entities that qualify for and have elected the private-company goodwill alternative, and the other model (the overall goodwill impairment model) is applicable to entities that have not elected (or are not able to elect) the private-company goodwill alternative.
The FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017 to simplify certain aspects of the overall goodwill impairment model. While ASU 2017-04 is not yet effective for all entities following this model, most of these entities have taken advantage of its early adoption provisions. For additional information about ASU 2017-04, see our white paper, Simplifying the test for goodwill impairment.
A goodwill impairment charge is recognized under the private-company goodwill alternative and the overall goodwill impairment model after adoption of ASU 2017-04 when the carrying amount of the reporting unit or entity (the latter is only an option for those entities that have elected the private-company goodwill alternative) is greater than its fair value. The amount of the goodwill impairment charge is the excess of the carrying amount of the reporting unit or entity over its fair value, limited to the carrying amount of goodwill allocated to the reporting unit or in the entity.
A goodwill impairment charge is generally not recognized under either the private-company goodwill alternative or the overall goodwill impairment model after the adoption of ASU 2017-04 when the carrying amount of a reporting unit or an entity is zero or negative because that carrying amount rarely will exceed its fair value in those circumstances. However, care should be exercised in a situation in which a reporting unit or an entity has a positive carrying amount that is trending downward. In those situations, the downward trend in the carrying amount may result from a triggering event that would require a goodwill impairment test (and potentially the recognition of a goodwill impairment charge) prior to the carrying amount of the reporting unit or entity reaching zero. Given the current economic environment, there should be a heightened awareness about the potential need to test a reporting unit or an entity with a downward-trending positive carrying amount for goodwill impairment due to the occurrence of a triggering event.
When an entity is following the overall goodwill impairment model after the adoption of ASU 2017-04 and it has one or more reporting units with a zero or negative carrying amount, it must disclose the following information: (a) the reporting units with allocated goodwill and the allocated amounts and (b) the reportable segment(s) that includes the reporting units.
For additional information about the goodwill impairment models in ASC 350-20-35, refer to our white paper, Snapshot: Accounting for the impairment of goodwill and other long-lived assets. For detailed discussion about the private-company goodwill impairment model, refer to our white paper, Simplified accounting for private companies: Goodwill.