If adopted, the update would change the way companies apply the current goodwill impairment test by removing Step 2 from the test. The removal of this step means preparers would no longer be required to conduct a hypothetical purchase price allocation to measure impairment loss, which can be costly and complex.
For example, under today’s impairment test, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is then calculated by deducting the fair value of all assets and liabilities of the reporting unit from the unit’s fair value as determined in Step 1. This exercise involves estimating the value of unrecognized intangible assets and corporate-level assets or liabilities, which can be difficult and complex.
By eliminating Step 2 of this test, preparers would perform the annual, or any interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
An entity would, however, still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
This proposal would also provide better alignment to IFRS, which also has a single step for goodwill impairment. However, other differences would remain.
Furthermore, the proposal would not change the timing of goodwill impairment (i.e., annual or more frequently if there are triggering events), or the unit of account to which the test is applied (i.e., reporting units).
The proposal would apply to all entities except for private companies that have adopted the Private Company Council (PCC) goodwill accounting alternative (ASU 2014-02)
Next steps
In a subsequent phase of this project, the FASB plans to address the subsequent measurement of goodwill, including whether or not goodwill should be amortized similar to other intangible assets.
Preparers should consider sharing their comments on the proposed update with the FASB. All comments are due by July 11, 2016.