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Testing Goodwill for Impairment

Changes in FASB Guidance on Impairment Testing

2011 brought significant changes to the FASB’s guidance for goodwill impairment testing, and 2012 will likely bring similar changes in the guidance for testing indefinite-lived intangible assets for impairment. American Appraisal has been closely monitoring this evolving guidance – read on to find out what you need to know about the changes and proposed updates.

ASU No. 2011-08 – Testing Goodwill for Impairment

In September of 2011, the FASB issued Accounting Standards Update No. 2011-08. This revised standard gives an entity the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines that it is NOT more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will not be necessary.

If the entity reaches the opposite conclusion, then it will be required to perform the first step of the quantitative test.  If the carrying amount of the reporting unit exceeds its fair value, then the entity will be required to perform the second step of the quantitative test to measure the amount of the impairment loss.

In addition, under the amendments, an entity no longer is permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year.

The amended guidance provides the following seven examples of events and circumstances an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount:

  1. 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
  2. Industry and market considerations such as a deterioration in the environment in which the entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider 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
  3. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
  4. 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
  5. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
  6. 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 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
  7. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).

The original guidance in ASC Topic 350 provided examples of events and circumstances that an entity should consider to determine whether an interim goodwill impairment test should be performed.  The above examples of events and circumstances from the amended guidance will supersede the prior examples, and the above examples will apply not only to the qualitative assessment but also to:

  • The assessment of whether an entity should test the goodwill on an interim basis, and
  • The assessment an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the goodwill impairment test.

While these changes did not eliminate the differences that currently exist between the FASB and IASB rules governing goodwill impairment testing, they are intended to reduce complexity and costs by allowing an entity (public or private) to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether quantitative testing is needed.

This revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.

Corollary to ASU No. 2011-08 – Testing Indefinite-Lived Intangible Assets for Impairment

More recently, on January 25, 2012, the FASB issued a proposed corollary to ASU No. 2011-08, which would allow companies to perform a similar qualitative assessment to determine whether a quantitative impairment test of indefinite-lived intangible assets is necessary. 

Under the proposed guidance:

  • An entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not (again, a likelihood of more than 50%) that the fair value of the asset is less than its carrying value. 
  • An entity has an unconditional option to bypass the qualitative assessment for any indefinite-lived intangible asset and proceed directly to performing the existing quantitative test. 
  • An entity may resume performing the qualitative test in any subsequent period.

The proposed guidance also restates the first five of the seven examples of events and circumstances an entity should consider when performing the qualitative test for goodwill impairment. 

Comments on the proposed guidance are due by April 24, 2012, and a final standard is expected in the second quarter of 2012.  The proposed changes would be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012, and early adoption would be permitted.


New goodwill impairment testing guidelines are in place for fiscal years beginning after December 15, 2011, and proposed changes may soon be applicable to fiscal years beginning after June 15, 2012. What do the changes mean for you and your organization?

American Appraisal assists clients with impairment testing on a daily basis. We continually review the publications of accounting firms on these and other critical topics, and our involvement in the FASB’s Appraisal Issues Task Force leaves us well positioned to assist our clients in interpreting the new guidance and proposed changes.





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