On August 10, 2011, the FASB approved a pending exposure draft, "Testing Goodwill for Impairment.” The revision to the accounting standards codification adds an optional qualitative assessment (referred to by some as the “Step Zero” test) to the annual goodwill impairment testing process. If, on the basis of an assessment of various qualitative factors, the reporting entity determines that it is more likely than not (i.e., a greater than 50% likelihood) that the fair value of a reporting unit exceeds its carrying value, the fair value of the reporting unit need not be measured. In other words, Step 1 of the goodwill impairment test will no longer be required if a reporting unit passes the qualitative Step Zero assessment.

The paragraphs added to Topic 350 (350-20-35-3A through 350-20-35-3G) include examples of events and circumstances that should be evaluated in preparing the qualitative assessment. The examples cited encompass macroeconomic, industry, market, and firm-specific factors.

A few things to keep in mind regarding this new addition to the codification:

  • The standard provides little guidance regarding what will constitute appropriate documentation of the Step Zero test. It remains to be seen how auditors will evaluate the reliability of such qualitative assessments.
  • The qualitative assessment is optional. Reporting entities may, at their discretion, elect to proceed directly to Step 1 fair value measurement of the reporting unit.
  • While the standard is not effective until financial years beginning after December 15, 2011, early adoption is permitted.
  • While the perceived need for the modification was attributed by the FASB to private companies, it applies to both private and public reporting entities.

The fair value reporting terrain continues to be rugged and uncertain. We are here to help. If you would like to discuss in confidence how the Step Zero test might apply to your company, please give one our experienced professionals a call.

About the Authors