Goodwill & Intangible Impairment in Accordance with FASB’s ASC 350 (SFAS 142)
Companies with GAAP based financial statements must comply with the accounting guidance set forth in Accounting Standards Codification 350 (“ASC 350”, formerly referred to as “SFAS 142”) which requires that goodwill and indefinite-lived assets be tested at least annually.
What is ASC 350?
Accounting Standards Codification 350 (formerly SFAS 142), commonly referred to as a “Goodwill and Intangible Asset Impairment Testing”, provides the accounting guidance used to determine if goodwill or indefinite-lived intangible assets have become impaired. Under ASC 350, companies must test goodwill for impairment on at least an annual basis. An impairment test may be required in the interim if certain “trigger events” occur. Examples of these trigger events are included within FASB’s ASU 2011-08. However, management may identify other events or circumstances that may be considered a trigger event in which interim testing should be considered.
The process to determine the potential for goodwill impairment tests includes two steps. The first step (“Step One”) of the impairment test compares the fair value of a reporting unit to its carrying value. If the fair value of the reporting unit exceeds carrying value, then the goodwill is considered not impaired. However, if the carrying value of the reporting unit is determined to be greater than the fair value, then the goodwill is considered to be impaired, thus requiring the second step. The second step is similar to a purchase price allocation pursuant to ASC 805, except that the carrying values of the tangible and intangible assets do not change. The sole purpose of the second step is to determine the fair value of goodwill so that the amount of goodwill impairment can be measured.
There are other requirements in ASC 350 that must be considered in order to properly apply the accounting guidance. In addition, impairment tests of other tangible and intangible assets will need to be considered prior to conducting the goodwill impairment test under ASC 350.
What is the Impact of ASU 2011-08?
Under FASB’s Accounting Standards Update 2011-08 (“ASU 2011-08”), an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of these qualitative factors, management determines it is not “more likely than not” that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if management concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in ASC 350. Under ASU 2011-08, an entity no longer is permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted by ASC 350.
ASU 2011-08 provides examples of events and circumstances that an entity should consider in evaluating whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount. However, these examples of events and circumstances are not intended to be all-inclusive and management may identify other relevant events or circumstances to consider in determining whether to perform the first step of the two-step impairment test. These examples of events and circumstances (both suggested within FASB in ASU 2011-08 and considered separately by management) should be consider when determining whether to test goodwill and indefinite-lived intangible assets for impairment both at and between the annual testing dates.
Our experts use commonly accepted valuation methodologies to derive supportable valuations to test for the potential impairment of goodwill and intangible assets. We prefer to engage the audit team early in the process to better facilitate the review process and reduce the time and burden on management. Our work is well-respected by the Big Four and regional accounting firms.
For more information about our valuation services contact:
Jamison Carson, CPA/ABV
Managing Director – Valuation Consulting Practice