ASU 2017-04: Simplifying the Test for Goodwill ImpairmentApril 13, 2017
Joshua Bloom, CPA, MSA
On January 26, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
Existing Goodwill Impairment Standards
FASB Goodwill Impairment Test:
Existing guidance from FASB includes a two-step impairment test for goodwill as follows:
- Step 1: Compare the estimated fair value of a reporting unit with the carrying value of the unit, including any goodwill already recorded on the books. If the carrying value of the reporting unit exceeds the estimated fair value, continue to Step 2.
- Step 2: The impairment amount is calculated as the excess of the carrying amount of goodwill over its implied fair value. The implied fair value is calculated as the difference between the fair value of the reporting unit and the fair value of the assets and liabilities included in the reporting unit, which is a net amount.
Private Company Council (PCC) Alternative under ASU 2014-02:
Under the goodwill accounting alternative allowed for private, for-profit companies, an impairment assessment of goodwill would only occur upon a triggering event. The company has the option of assessing impairment at the company-wide level or the reporting unit level. The PCC alternative also requires goodwill to be amortized on a straight-line basis over a period of ten years, or less in certain circumstances.
New Goodwill Impairment Testing Standard
To simplify the subsequent measurement of goodwill under the FASB Goodwill Impairment Test and to help financial statement preparers and accountants with an analysis that is often considered costly and complex, the FASB eliminated Step 2 from the goodwill impairment test. An organization should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An enity would then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s estimated fair value, however goodwill would not be reduced below zero.
FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The same impairment test would therefore apply to all reporting units, and an entity would be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
Entities still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The FASB stated that the entity should consider the income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
Goodwill Impairment Implementation
SEC Filers are required to adopt the new standard for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 (calendar year 2020). Public business entities that are not SEC filers should adopt the standard in fiscal years beginning after December 15, 2020 (calendar year 2021). All other entities, including not-for-profit organizations, should adopt the standard in fiscal years beginning after December 15, 2021 (calendar year 2022). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.
Private companies that have adopted the private company alternative to subsume certain intangible assets into goodwill and have also adopted the goodwill alternative are not permitted to adopt the new guidance upon issuance without following the guidance in FASB Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, including justifying why it is preferable to change their accounting policies.
How BlumShapiro Can Help
BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with over 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits and litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.