In December 2011, FASB issued ASU 2011-08, which introduced a new qualitative step to the goodwill impairment testing process.
“An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. An entity has an unconditional option to bypass the qualitative assessment described in the preceding paragraph for any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment.”
The so called “Step 0” impairment test was expected to save firms time and money when it came to testing and reporting their goodwill balances. According to Duff & Phelps, 69% of private companies and 81% of public companies surveyed anticipated applying the Step 0 qualitative test in 2011. One year later, 52% of private companies and 43% of public companies reported actually using Step 0. So what are the issues that keep companies from using the Step 0 qualitative test as expected?
The qualitative nature of Step 0 does not produce measurable values. The impact of qualitative factors such as macroeconomic conditions, cost factors, and industry trends must be ascertained. In cases where such factors are difficult to identify or are determined to have a negative impact on the reporting unit, auditors may deem Step 0 insufficient.
Uncertainty Regarding Step 0
As the Step 0 process is relatively new and ASC 350-20-35-3 provides only limited guidance, companies may feel hesitant to attempt to identify and measure qualitative factors.
Preference for Step 1
The Step 1 goodwill impairment test generates the fair value of the reporting unit’s equity. The process and results are a routine part of many companies’ financial reporting activities and switching to Step 0 can be perceived as cumbersome and unnecessary.
Mercer Capital is experienced in performing both Step 1 and Step 0 tests. A conversation with your auditor and with a professional at Mercer Capital can help you determine which level of impairment test is most appropriate for a reporting unit at a given time. Within the Step 0 process, Mercer Capital understands the sensitivities that surround identifying and documenting the appropriate qualitative factors as well as relating the results to prior Step 1 tests.
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