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. Under Step 1, if the fair value of the reporting unit is greater than the carrying amount, there is no impairment and further action is unnecessary. If, however, the fair value is less than the carrying amount, goodwill may be impaired. Under current FASB guidance, a Step 2 analysis is performed to determine the fair value of goodwill and hence the level of goodwill impairment. Step 2 is similar to a purchase price allocation where the fair value of goodwill is determined based on the value of the reporting unit less the fair value of reporting unit’s assets and liabilities.
There are currently several alternatives that are also permissible under U.S. GAAP:
STEP 1. Instead of performing a calculation of the fair value of a reporting unit, under ASC 350 companies may perform a qualitative assessment to determine whether it is more likely than not that the carrying amount is less than the fair value.
STEP 2. Instead of completing a Step 2 calculation, under ASU 2017-04 companies may elect to apply a simplified approach to determine the level of goodwill impairment. Under this approach, the level of goodwill impairment is the amount by which the carrying amount of the reporting unit exceeds its fair value. It is important for companies to understand that the impairment amount between the Step 2 approach and the simplified approach may differ materially.
VRC has extensive experience with valuations of both reporting units and their assets for goodwill impairment testing purposes.
More Perspectives: Goodwill Impairment
The Current State of Goodwill & Impairments
PJ Patel, Co-CEO and Pranav Ghai, co-Founder and CEO of Calcbench, discuss corporate goodwill, goodwill impairment, and financial analysis techniques that analysts can use to assess the value of goodwill assets on the corporate balance sheet.
The Data Behind the Video
Download the detailed presentation, which includes the latest graphics, statistics, and purchase price allocation examples on goodwill, courtesy of Calcbench.
First, Do No Harm
Opinion: The FASB is soliciting feedback on whether and how to further simplify the accounting for goodwill and intangible assets for public companies. This may be setting off down a harmful course of accounting treatment.
Tracking Performance of Past Acquisitions
Courtesy of Calcbench, get their report that provides examples of how to track performance of past acquisitions including Intel’s purchase of Mobileye; the merger of Dow and DuPont; and 3M’s purchase of Scott Safety.
Goodwill Hunting: The Implications of Eliminating Step 2
FASB has sought to simplify the accounting for goodwill impairment for several years and the elimination of Step 2 for public companies, released in ASU 2017-04, is the next step in doing so. VRC’s Jane Myung discusses how the change applies to the impairment testing process as well as the implications.