Ch. 3 Goodwill Impairment Testing

ASC Topic 350

provides accounting standards for reporting income statement effects of impairment of intangibles acquired in a business combination.

Indefinite Life Intangibles

Intangible assets with indefinite lives are tested for impairment on an annual basis. An entity has the option to first perform qualitative assessments to determine whether "it is more likely than not" that the asset is impaired. If so, a quantitative test must be performed. The asset's carrying value is compared to its fair value. If fair value is less than carrying value, the intangible asset is considered impaired and an impairment loss is recognized. The asset's carrying value is reduced accordingly.

Discuss the rationale for the goodwill impairment testing approach

When accounting for goodwill subsequent to the acquisition date, GAAP requires an impairment approach rather than amortization. FASB reasoned that goodwill can decrease over time. It does not do so in a "rational and systematic" manner. Goodwill impairment losses are reported as operating items in the consolidated income statement. FASB provides firms the option to conduct a qualitative analysis to assess whether further testing procedures are appropriate. If circumstances indicate a potential decline in the fair value of a reporting unit below its carrying amount, further tests are required to see if goodwill is the source of the decline.

Accounting Standards Update No. 2017-04

To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Effective Date and Transition For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption is permitted.

Factors to be considered in determining the useful life of an intangible asset include:

-Legal, regulatory, or contractual provisions. -The effects of obsolescence, demand, competition, industry stability, rate of technological change, and expected changes in distribution channels. -The enterprise's expected use of the intangible asset. -The level of maintenance expenditure required to obtain the asset's expected future benefits.

Amortization of intangibles with finite lives

All identified intangible assets with finite lives should be amortized over their economic useful life that reflects the pattern of decline in the economic usefulness of the asset.

Step 2

Is Goodwill's Implied Value Less Than Its Carrying Amount? compares the implied fair value of goodwill to its carrying amount Implied value of goodwill can be determined using quoted market prices, similar businesses, or present value of future cash flows. Is implied fair value of goodwill less than recorded goodwill? -If no, Goodwill is NOT impaired. No further testing is required. -If yes, an impairment loss is recorded for the excess carrying value over implied fair value.

Step 1

Is the Carrying Amount of a Reporting Unit More Than Its Fair Value? Calculate fair values for each reporting unit with allocated goodwill. Fair value (with allocated goodwill) is compared to the carrying value (including goodwill) of the consolidated entity's reporting unit. Does fair value of the reporting unit exceed carrying value? -If yes, Goodwill is NOT impaired. No further testing is required. -If no, a second step must be taken to test for impairment.

When to Test Goodwill for Impairment?

assess goodwill for impairment annually for each reporting unit where goodwill resides. More frequent impairment assessment is required if events or circumstances change that make it more likely than not that reporting unit's fair value has fallen below its carrying amount. If after performing the qualitative assessment, it appears that it is more likely than not the fair value is less than its carrying amount, Step 1 of the two-step impairment test is required.