FASB Proposes Simplified Goodwill Impairment Test

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May 12 — The Financial Accounting Standards Board proposed a simplified goodwill impairment test that companies must perform annually, or when a triggering event occurs.

A company records goodwill when it buys another company and the price of the acquired firm greatly exceeds the fair value of the firm's identifiable assets—tangible and intangible—and liabilities acquired. It puts goodwill—sometimes worth billions of dollars—on the balance sheet as a noncurrent asset, and it must perform a goodwill impairment test at least once a year (11 APPR 1013, 11/6/15).

FASB's May 12 proposal would eliminate the second step of the standard setter's two-step impairment test, thereby making the process easier and less costly, according to the main tenets of the proposal.

Main Provisions

FASB proposed that an annual—or any interim—goodwill impairment test should compare the fair value of a reporting unit with its carrying amount (12 APPR 01, 1/15/16). If the carrying amount exceeds the reporting unit's fair value, an impairment charge would be recognized for the difference. However, “that amount shouldn't exceed the carrying amount of goodwill allocated to that reporting unit,” the proposal states.

The proposal retains the option for a company to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

It requires a company to disclose the existence of any reporting units with zero or negative carrying amounts and the amount of goodwill allocated to them. However, those reporting units would be subject to the same quantitative impairment test as reporting units with positive carrying amounts, the proposal states.

Implementation and Disclosures

The proposal would require prospective application and transition disclosures. A company would disclose the nature of—and reason for—the change in accounting principle upon transition, the proposal said.

A company would disclose the change in accounting principle in the first annual period after the date the company adopted the rule, and in the interim periods within that first annual period.

FASB wants comments submitted by July 11 on the on the proposal, Intangibles—Goodwill and Other (Topic 350), Simplifying the Accounting for Goodwill Impairment.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com

For a copy of the board's proposal including how to submit comments, go to http://src.bna.com/eW4.