|FASB Issues Changes to Goodwill Impairment Testing|
On September 15, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Testing Goodwill for Impairment, which simplifies the requirements for goodwill impairment testing in the FASB Standards Codification Subtopic 350-20 (formerly SFAS No. 142).
Currently, an entity is required to test goodwill for impairment at least annually by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the entity must test to measure the amount of the impairment loss, if any (step two). Under ASU No. 2011-08's amendments, an entity will continue to test goodwill for impairment at least annually, but it is not required to perform step one unless the entity determines through qualitative factors that it is more likely than not that the reporting unit's fair value is less than its carrying amount, including goodwill.
The entity also has the option to skip the qualitative assessment and continue to perform the two-step goodwill impairment test on an annual basis. Although the new goodwill impairment model essentially includes an additional step (the initial qualitative evaluation), it lowers the probability of performing the first step of the two-step goodwill impairment test, which should reduce the recurring cost and complexity associated with goodwill impairment testing.
The new guidance includes the following examples of events and circumstances that an entity should consider in recurring qualitative evaluation of goodwill:
- Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline (both absolute and relative to its peers) in market-dependent multiples or metrics, a change in the market for an entity's products or services, or a regulatory or political development;
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings;
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings;
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation;
- Events affecting a reporting unit such as a change in the carrying amount of its net assets;
- A sustained decrease (both absolute and relative to its peers) in share price, if applicable.
The above examples are not all-inclusive and none of the individual examples of events and circumstances are intended to represent standalone events or circumstances (necessitating an entity to perform step one of the goodwill impairment test). The new guidance also states an entity should consider (1) how significant each of the adverse events or circumstances identified could be to the estimated fair value of its reporting unit and (2) positive and mitigating events and circumstances that may affect its determination. The new guidance also eases quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy for goodwill after its initial recognition in a business combination.
The amendments in ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity's financial statements for the most recent annual or interim period have not yet been issued or (for nonpublic companies) have not yet been made available for issuance. The ASU is available on the FASB's website at www.fasb.org.