FASB drops Step 2 from goodwill impairment test

By Ken Tysiac

FASB eliminated Step 2 from the goodwill impairment test in an effort to simplify accounting in a new standard issued Thursday.

Under the amendments issued Thursday, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The same impairment test will therefore apply to all reporting units, and an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.

Financial statement preparers also still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

The changes are contained in Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.

The new standard applies to public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill.

Private companies that have adopted the private company alternative for goodwill but not the private company alternative to subsume certain intangible assets into goodwill are permitted, but not required, to adopt the amendments in the new standard without having to justify preferability of the accounting change if it is adopted on or before the effective date.

Private companies that have adopted the private company alternative to subsume certain intangible assets into goodwill and have also adopted the goodwill alternative are not permitted to adopt the new guidance upon issuance without following the guidance in FASB Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, including justifying why it is preferable to change their accounting policies.

SEC filers are required to adopt the new standard for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019. Public business entities that are not SEC filers should adopt the standard for annual or interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2020.

All other entities, including not-for-profits, that are adopting the amendments should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2021.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after Jan. 1, 2017.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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