Goodwill Impairment Testing for Financial Reporting-What’s Changed and What CFOs & Controllers Need to Know


Has anything changed in goodwill impairment testing this year that I should be familiar with?

Yes. In January, the Financial Accounting Standard Board issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”), simplifying the testing of goodwill impairment under Accounting Standards Codification Topic 350, Intangibles-Goodwill and Other. More specifically, the ASU eliminates Step 2 of Topic 350 and modifies Step 1 to include the calculation of the amount of the goodwill impairment.

How does ASU 2017-04 change my company’s annual goodwill impairment testing?
Under the ASU, measurement of the amount of impairment is now calculated as the difference in the carrying value of the reporting unit, minus the fair value of the reporting unit [emphasis added]. Prior to this ASU, the measurement of the amount of impairment was calculated as the difference in the reporting unit’s carrying value of goodwill, minus the reporting unit’s implied fair value of goodwill [emphasis added]. Thus, the Step 1 and Step 2 testing of the old regime have been consolidated into one “Quantitative Impairment Test,” with elimination of Step 2. A qualitative assessment of impairment testing (aka Step 0) is unchanged by this ASU.

When is the effective date for ASU 2017-04?
Early adoption of the ASU is permitted on testing dates after January 1, 2017. If early adoption is not sought, this ASU is effective for U.S. Securities and Exchange Commission filers for goodwill impairment tests starting in fiscal years beginning after December 15, 2019, and for public business entities that are not SEC filers, starting in fiscal years beginning after December 15, 2020.

Is there any reason my company would not want to early adopt ASU 2017-04?
Yes. Although un-common in practice historically, it is possible that recognition of any goodwill impairment could be avoided (appropriately) under the Step 1 and Step 2 regime (i.e., prior to adoption of ASU 2017-04). This would occur in certain facts and circumstances where the economic driver of the failure under the Step 1 test is due to reasons discretely outside of the attributes of the reporting unit’s goodwill, such as a loss of a key customer. More specifically, this would occur in Step 2 testing when the measurement of the fair value of the customer relationships intangible asset is lower than its carrying value, to the extent that such difference fully absorbs the difference in the carrying value of the reporting unit over its fair value under the Step 1 test [emphasis added].

Is there anything else I should know about ASU 2017-04 and its impact on my annual goodwill impairment test?
Yes. The ASU provides clarified guidance on: a) assigning acquired assets and assumed liabilities to a reporting unit; b) deferred income tax considerations in the fair value measurement; and c) how to adjust the conundrum of the deferred income tax balance when a goodwill impairment is recognized, in those instances when the reporting unit has tax deductible goodwill reflected in its carrying value.

What should I do next?
Please contact John Schumacher of Adamy Valuation for further questions on this topic, and any member of the Adamy Valuation team if you would like to explore how we can be of service with your company’s fair value measurements and any other valuation needs. Additionally, click here if you would like to read the full text of ASU 2017-04.

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