Goodwill: Reporting units with carrying amounts trending downward
FINANCIAL REPORTING INSIGHTS |
The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. While ASU 2017-04 is not first effective for certain entities until fiscal years beginning after December 15, 2019, it may be adopted early by all entities in any interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
A goodwill impairment charge is recognized under the overall goodwill impairment model after adoption of ASU 2017-04 when the carrying amount of the reporting unit is greater than its fair value. The amount of the goodwill impairment charge is the excess of the carrying amount of the reporting unit over its fair value, limited to the carrying amount of goodwill allocated to the reporting unit.
After the adoption of ASU 2017-04, a goodwill impairment charge is generally not recognized under the overall goodwill impairment model when the carrying amount of a reporting unit is zero or negative because the carrying amount of a reporting unit rarely will exceed its fair value when the carrying amount is zero or negative. However, care should be exercised in a situation in which a reporting unit 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 an interim goodwill impairment test (and potentially the recognition of a goodwill impairment charge) prior to the carrying amount of the reporting unit reaching zero. The requirement to test goodwill for impairment on an interim basis when a triggering event is present applies regardless of whether an entity issues financial statements on an interim basis. In other words, when an entity only issues financial statements on an annual basis and the carrying amount of one of its reporting units goes from positive at the beginning of the year to negative by the entity’s annual goodwill impairment testing date, the entity should carefully consider whether there was a triggering event before the reporting unit’s carrying amount went negative that should have resulted in the entity performing an interim goodwill impairment test. When an entity has one or more reporting units with a zero or negative carrying amount, the entity must disclose the following information after the adoption of ASU 2017-04: (a) the reporting units with allocated goodwill and the allocated amounts and (b) the reportable segment that includes the reporting units.
For additional information about ASU 2017-04, the overall goodwill impairment model before and after the ASU is adopted and the private company goodwill alternative, refer to our white paper, Snapshot: Accounting for the impairment of goodwill and other long-lived assets.