VRC has extensive experience with valuations of reporting units and their assets for goodwill impairment testing purposes. Our professionals also offer deep expertise with long-lived and intangible asset impairment testing.
Accounting Standards Codification 350 (ASC 350) defines the testing for goodwill impairment. In the impairment test, which should be performed at least annually and potentially in interim periods if there is a triggering event, the fair value of the reporting unit is compared with the carrying amount.
Traditionally, testing for goodwill impairment was a two-step process, however in ASU No. 2017-04, the FASB eliminated Step 2 of the test. In the Step 2 test, an entity was to perform a hypothetical purchase price allocation to determine the amount of an impairment.
Entities record for impairment based solely on Step 1, which compares the fair value of a reporting unit with the carrying amount. If the fair value is greater than the carrying amount, there is no impairment. If the fair value is less than the carrying amount, the entity will record an impairment charge equal to the difference (not to exceed the carrying amount of goodwill). This also applies to reporting units with zero or negative carrying amounts, which will always pass Step 1 as the fair value of a reporting unit cannot be lower than zero. Previously, reporting units with zero or negative carrying amounts had to perform a qualitative assessment to determine whether to proceed to Step 2. The qualitative assessment is eliminated and entities with reporting units with zero or negative carrying amounts will simply be required to disclose the amount of goodwill allocated to each reporting unit.
For entities with tax-deductible goodwill, the FASB requires that they consider the deferred tax effect when measuring the goodwill loss. When goodwill is tax deductible, a goodwill impairment charge would increase a deferred tax asset or decrease a deferred tax liability, causing a subsequent change in the carrying amount. In order to avoid a continuous cycle of impairment charges, an entity should consider the impact on deferred taxes concurrent with the impairment charge.
In 2021, total goodwill assets on company balance sheets of the S&P 500 nearly topped $3.6 trillion, a net increase of more than $880 billion since 2017. And the asset is not exclusive to larger-cap companies; in that same year, looking at all public companies in the U.S., the figure was estimated at roughly $5.6 trillion. And with a continued growth trajectory of net goodwill, the stakes remain high.
VRC works with hundreds of companies to monitor the value of their goodwill as the figure on balance sheets continues to increase steadily. Regular and transparent impairment testing is a necessity, ultimately benefiting companies by acting as a check on dealmaking. We welcome you to contact a VRC professional for a deeper conversation about current goodwill impairment testing standards and how you can benefit from our expertise to establish key decision points to test for goodwill impairment.
Co-CEO and Senior Managing Director
Tel. No. (609) 243-7030
Edward Hamilton, CFA
Tel. No. (609) 883-7651