FASB has approved a revised accounting standard intended to simplify how companies test goodwill for impairment. Current guidance requires a company to test goodwill for impairment, at least annually, using a two-step process. The amendments to Topic 350 in the Codification will allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Companies will no longer be required to calculate the fair value of a reporting unit unless they determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment.
Prior to the revisions, companies were required to annually test goodwill for impairment by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption will be permitted.
The amendments are intended to reduce complexity and costs by allowing a company to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The current standard would be improved by expanding upon the examples of events and circumstances that a company should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Also, the revisions improve the examples of events and circumstances that a company having a reporting unit with a zero or negative carrying amount would consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test
International Accounting Standard 36, Impairment of Assets, requires a company to test goodwill for impairment using a single-step quantitative test performed at the level of a cash-generating unit or group of cash-generating units. The test must be performed at least annually and between annual tests whenever there is an indication of impairment. IAS 36 requires companies to compare the carrying amount of a cash-generating unit with its recoverable amount. A company would record the excess of the carrying amount over the recoverable amount as an impairment loss, and the amount of that impairment loss is not limited to the carrying amount of goodwill recorded in the cash-generating unit.
FASB recognizes that the amendments do not improve convergence of Topic 350 and IAS 36 relating to how a company tests goodwill for impairment. The Board believes that such an effort is beyond the scope of this change and should be done more broadly, by comprehensively addressing these and other differences in impairment guidance between U.S. GAAP and IFRS.