If a company elects to use the option, it must decide - on the basis of qualitative information - whether it is more than 50% likely that the fair value of a reporting unit is less than its carrying amount.  If so, the existing quantitative calculations in steps one and two continue to apply.  However, if fair value exceeds the carrying amount, neither of the two steps in the current goodwill test is required.  The new option applies to both public and private companies, and is available for early adoption in the third quarter of 2011.

 

BACKGROUND

In the past, companies have calculated a reporting unit’s fair value in the first of two steps for assessing impairment.  If the fair value of the reporting unit is more than its carrying amount, there is no impairment.  If fair value is less, a second step of analysis is performed to determine the amount of impairment, if any. Public companies with only one reporting unit often used market capitalization to estimate fair value in step one.  However, private companies would commonly prepare a discounted cash flow projection or purchase a valuation report from a consultant to estimate fair value.  Public companies with multiple reporting units faced similar circumstances.
As indicated in its press release, “The [FASB’s] decision…comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test,” states FASB member Daryl Buck.  “The amendments approved by the FASB address those concerns and will simplify the process for public and nonpublic entities alike.”

 

MAIN PROVISIONS

The FASB issued Accounting Standards Update (ASU) 2011-8, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, on September 15, 2011. Its main provisions include:

• The amendments allows companies to first assess qualitative factors to determine whether it is necessary to perform the current two-step quantitative goodwill impairment test in ASC 350.
• Companies are no longer required to calculate the fair value of a reporting unit³ unless a determination is made, based on a qualitative assessment, that it is more likely than not (i.e., > 50%) that the fair value of a reporting unit is less than its carrying amount.
• The amendments also allow companies to skip the optional qualitative assessment and continue applying the existing two-step test.
• If a company opts not to use the qualitative assessment in one period, it may resume performing the qualitative assessment in any subsequent period.
• The ASU includes examples of events and circumstances to consider in conducting the qualitative assessment.  However, the ASU does not provide a comprehensive example of how an entity concludes, on the basis of available evidence, whether the traditional step one is required.  Rather, that judgment will depend on individual facts and circumstances.
• No new disclosures will be required in the final ASU.

 

EFFECT ON REPORTING UNITS WITH NEGATIVE EQUITY (ASU 2010-28)

For reporting units with zero or negative carrying amounts, companies are required to perform a similar qualitative assessment to determine whether it is more likely than not that goodwill is impaired (as opposed to an evaluation of the fair value of the reporting unit). If it is more than 50% likely that goodwill is impaired, then step two of the traditional impairment test is required. ASU 2011-08 makes two changes the initial qualitative assessment for reporting units with negative equity:

• First, companies are required to consider the new list events and circumstances in ASU 2011-08, rather than those previously contained in 350-20-35-8A. This includes attributing more weight to the events and circumstances that most affect the fair value of the carrying amount of goodwill.
• Second, companies are required to take into consideration whether there are significant differences between the carrying amount and the estimated fair value of a reporting unit’s assets and liabilities, including the existence of significant unrecognized intangible assets.

These changes are not expected to significantly change practice for reporting units with zero or negative amounts of equity.

 

EFFECTIVE DATE AND TRANSITION

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, including third quarter financial statements of calendar-year companies that have not yet been issued.

 

CONTACT:

If you would like further information or to discuss the implications of the matters discussed in this newsletter, please contact the engagement Principal serving you or one of the following HBK QC Principals:

PHIL WILSON 330-758-8613 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

BRUCE WALSTON 330-758-8613 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

SCOTT ROUSH 330-758-8613 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

CRAIG STEINHOFF 330-758-8613 This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

¹ See FASB press release at
http://www.fasb.org/cs/ContentServer?site=FASB&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176158826791.
² See ASC 350—Intangibles—Goodwill and Other—Goodwill
³ See effect on current US GAAP (ASU 2010-28) below. 

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