By Cydney Posner
Yesterday, FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The Update simplifies how an entity tests goodwill for impairment. (See my email of 8/12.) The Update allows entities an option to first assess qualitative factors to determine whether it is even necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not (that is, a likelihood of more than 50%) that its fair value is less than its carrying amount. The guidance also includes the following as examples of the types of events and circumstances to be considered in conducting the qualitative assessment:
- 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 in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), 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 and cash flows;
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
- 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 composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of 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 in share price (considered in both absolute terms and relative to peers).
In making the determination, the entity will need to evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances; none of the individual examples above is intended to be determinative by itself. Also, the existence of positive and mitigating events and circumstances does not create a rebuttable presumption that an entity need not perform the first step of the goodwill impairment test.
The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption will be permitted.