Do Not Pass Go…New Goodwill Impairment Rules for Negative Reporting Unit Carrying Values
In December 2010, the FASB issued ASU 2010-28, which updated rules pertaining to the appropriate measure of reporting unit carrying value. Historically, the carrying value of a reporting unit could be measured on an equity or total capital basis, as long as it was compared to the corresponding measure of value for the Step 1 goodwill impairment test. ASU 2010-28 mandates that reporting unit carrying value can only be measured on an equity basis. Under the Step 1 impairment test which compares reporting unit carrying value to fair value, any reporting unit with a zero or negative equity carrying value automatically passes the test (because the fair value of an equity stake generally cannot be less than zero).
New Step 2 Criteria
To address this issue, ASU 2010-28 introduces the new requirement that any reporting unit with zero or negative carrying value must automatically perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The update provides a list of qualitative factors that should be considered in making this "more likely than not" determination, examples of which include:
- A significant adverse change in legal factors or in the business climate
- An adverse action or assessment by a regulator
- Unanticipated competition
- Loss of key personnel
For public entities, the update is effective for fiscal years beginning after December 15, 2010. For non-public entities, the update is effective for fiscal years beginning after December 15, 2011, but early adoption is permitted.
About the Authors
Travis W. Harms
Travis W. Harms leads Mercer Capital’s Financial Reporting Valuation Group. Travis’s practice focuses on providing public and private clients with fair value opinions and related assistance pertaining to goodwill and other intangible assets, stock-based compensation, ...
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