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.
FASB Goodwill Impairment Test:
Existing guidance from FASB includes a two-step impairment test for goodwill as follows:
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.
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.
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.