FASB proposes simplifying goodwill impairment testing

Goodwill impairment testing would be simplified under a proposal FASB issued Thursday.

FASB proposed removing Step 2 from the current goodwill impairment test. Under current GAAP, Step 2 includes determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill.

In computing the implied fair value of goodwill under Step 2, an entity must perform procedures to determine the fair value at the impairment testing date of its assets and liabilities—including unrecognized assets and liabilities—following the procedure that would be required in a purchase price allocation for an acquired business.

Under the proposed amendments, an entity would perform its annual or any interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Generally, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. That amount should not exceed the carrying amount of goodwill allocated to that reporting unit.

An entity still would have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

In addition, FASB is proposing to remove 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. Therefore, the same impairment assessment would apply to all reporting units.

An entity would be required to disclose the existence of any reporting units with zero or negative carrying amounts and the amount of goodwill allocated to those reporting units.

By removing Step 2 from the goodwill impairment test, FASB expects to reduce the cost and complexity of evaluating goodwill for impairment.

The proposal resulted from Phase 1 of a project that was added to FASB’s agenda after the board issued a standard to allow private companies an alternative accounting treatment for subsequently measuring goodwill. The board considered whether similar amendments should be considered for other entities, including public companies and not-for-profits.

Phase 1 led to Thursday’s proposal. In a future phase of the project, FASB expects to consider additional changes to the subsequent accounting for goodwill, including possibly permitting or requiring amortization of goodwill and/or further changes to impairment testing methods.

Comments on Thursday’s Proposed Accounting Standards Update, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, can be submitted at FASB’s website by July 11.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.