Mercer Capital's Financial Reporting Blog

New Rules for Goodwill Impairment?

The Brexit vote last week delivered an unexpected (depending on who you ask) macro surprise to financial markets across the globe. While the impact of broad-based volatility on individual companies will obviously vary, negative shocks to stock prices can trigger the need for impairment tests. The following outlines some recent changes to the impairment testing regime – this post first appeared in October 2015 on the Financial Reporting Blog, which provides corporate finance managers with periodic updates and commentary around several topics including impairment testing.

As the end of the year approaches, many companies are preparing for goodwill impairment testing, which frequently takes place in the fourth quarter. And even with some sectors of the equity markets at near-record highs, the potential for goodwill impairment can still be a very real issue for businesses in certain industries.

It is against this backdrop that the FASB has proposed some changes to the way companies test goodwill for impairment. At a meeting of the FASB on October 28, 2015, the Board discussed whether and how to change the subsequent measurement of goodwill for public companies and not-for-profit entities. These developments are just latest in the nearly two years of discussions on the topic dating back to November of 2013.

The Board has tentatively decided to proceed with the project under a phased approach.

  • Phase 1 – The first phase aims to simplify the goodwill impairment test by removing the requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value. That analysis is currently referred to as Step 2 of the impairment model under ASC 350. The Board considered but decided not to allow entities an option to perform step 2.
  • Phase 2 – In the second phase of the project, the Board plans to work concurrently with the IASB to address any additional concerns about the subsequent accounting for goodwill.

With respect to not-for-profit entities, the Board decided not to allow not-for-profit entities the accounting alternative currently available to private companies (which includes the amortization of goodwill and a one-step, trigger-based impairment test performed at the entity level or reporting unit level) at this time.

Another area of concern in recent years has been the challenges of performing a goodwill impairment test for reporting units with zero or negative carrying value. In conjunction with the simplified approach to calculating the amount of an impairment charge (elimination of Step 2), the Board decided that if a reporting unit has zero or negative carrying value and it is more likely than not that goodwill is impaired, an entity would be required to write off the full carrying amount of goodwill allocated to that reporting unit. The Board also indicated that it would further analyze the qualitative assessment for entities with reporting units with a zero or negative carrying value. The proposed rules would not affect when companies should consider interim goodwill impairment testing.

If you have questions regarding impairment testing and how the proposed new rules might affect your company, please contact a Mercer Capital professional to discuss your situation in confidence.

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Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter @MercerFairValue.