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By Denise Lugo
Oct. 11 — Companies will have a cheaper, simpler way to apply the goodwill impairment test under rules the Financial Accounting Standards Board plans to finalize.
FASB affirmed, on a 4-3 vote Oct. 10, its proposed elimination of the second step of the two-step goodwill impairment test that companies are currently required to perform. The goal of the simplification, which was proposed in May, is to reduce costs for preparers while maintaining the usefulness of information provided to financial statement users, board members said.
However, some firms have said the change, though simpler, could decrease precision of goodwill impairment calculations and cause some firms to recognize impairment where none exists.
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. Goodwill—worth billions in assets for some firms—is recorded on the balance sheet as a noncurrent asset.
Current rules require companies to perform a goodwill impairment test at least once a year.
Many have complained that the current two-step test is costly and complex.
If under Step 1 of the test, the carrying value of a reporting unit exceeds the fair value, then Step 2 is performed. Step 2 compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds the implied fair value, the difference will be recorded as a goodwill impairment loss.
FASB received 59 comment letters by its July deadline on the proposal, Intangibles--Goodwill and Other (ASC Topic 350): Simplifying the Accounting for Goodwill Impairment. Most respondents supported the board’s objective to reduce cost and complexity, but some didn’t agree on how to meet the objective, according to a FASB staff accountant during the meeting.
FASB’s affirmation of the one-step proposal means that a goodwill impairment test should compare the fair value of a reporting unit with its carrying amount, including goodwill. 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 one-step impairment test should also be applied for reporting units with zero or negative carrying amounts, FASB also agreed. Moreover, companies would have to disclose the reporting units with zero or negative carrying amounts that have goodwill allocated to them, and the amounts of allocated goodwill.
Among other decisions the board affirmed is that the proposal would require prospective application. FASB said it would still need to do an external review of the potential changes, which are being worked on under Phase 1 of a two-phased project.
Some in the financial services and insurance sectors have said a one-step impairment test decreases precision of goodwill impairment calculations.
Furthermore, they’ve expressed concerns that impairment could be recognized through this process even though it is related to decreases in the fair value of other assets other than goodwill, or increases in the fair value of liabilities. Some firms suggested that FASB retain step 2 as an optional policy election or include an exception to recognize impairment based on the step 1 results.
Board members who voted against the proposed impairment test expressed similar concerns as those raised by banks and insurance companies—that eliminating step two would result in an imprecise measurement of goodwill. One board member said that the simplification would cause a company to have to recognize impairment when currently low interest rates rise. Some board members therefore felt—among other suggestions—the board should retain step 2 as an optional policy election.
FASB members who agreed with the proposal, however, said it was ironic that an option is being considered in the face of many companies questioning the relevance of goodwill in the first place. “Many of us would probably prefer to get rid of it on day one, others are preferring to amortize it over some relatively arbitrary time frame, etc.,” FASB member Daryl Buck. said.
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For a discussion on accounting for goodwill and other intangible assets, see 5115-4th, Goodwill and Other Intangible Assets .
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