FASB Issues Proposed Accounting Standards Update on Testing Goodwill for Impairment

By Cydney Posner

The Financial Accounting Standards Board (FASB) has issued a new Exposure Draft for a proposed update to the accounting standard related to goodwill impairments.  Apparently, FASB had received complaints about the cost and complexity of performing the first step of the two-step goodwill impairment test required under "Topic 350, Intangibles—Goodwill and Other," especially for nonpublic companies. The proposal is intended to simplify goodwill impairment testing by allowing a company to first assess qualitative factors to determine whether it was even necessary to perform the two-step quantitative goodwill impairment test. Under the current standard, a company is required to test goodwill for impairment at least annually using a quantitative analysis that first compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of impairment loss, if any. Under the proposed amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determined, based on a qualitative assessment, that it was more likely than not that its fair value was less than its carrying amount.

The proposal identifies a number of factors to consider in conducting the qualitative assessment, as follows:

• Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets; 
• Industry and market considerations, such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline (both absolute and relative to its peers) in market-dependent multiples or metrics, a change in the market for an entity's products or services, or a regulatory or political development;
• Cost factors, such as increases in raw materials, labor, or other costs that have a negative effect on earnings;
• Overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings;
• Other relevant entity-specific events, such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation'
• Events affecting a reporting unit, such as a change in the carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion of, a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and
• If applicable, a sustained decrease (both absolute and relative to its peers) in share price.

The examples are not exclusive and none is intended to be dispositive by itself; in reaching its conclusion, the company is supposed to assess the totality of the events and circumstances. Companies should also consider other relevant circumstances, as well as the significance of each of the adverse factors identified to the fair value of the reporting unit, positive and mitigating events and circumstances (although the existence of positive and mitigating circumstances is not intended to represent a rebuttable presumption that an entity should not perform the first step of the goodwill impairment test).

If approved, the amendments in the proposed update would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption would be permitted.

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