Goodwill Impairment Changing Under Revamped Standard: A Q&A with Gary Roland of Duff & Phelps

The Financial Executives Research Foundation's interview with Gary Roland, a Duff & Phelps Managing Director, on this year’s survey findings and the implications for financial preparers,


In January of 2017, the Financial Accounting Standards Board adopted an Accounting Standards Update designed to simplify the accounting for goodwill impairment.

ASU 2017-04 (Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment) was designed to reduce the complexity and potential costs associated with goodwill impairment, in part, by eliminating Step 2 of the current impairment test, which requires the calculation of the implied fair value of goodwill.

Under the new standard, effective in 2020 for calendar-year public business entities that are SEC filers, companies will base impairment charges on the excess of a reporting unit’s carrying amount over its fair value determined in Step 1 of the impairment test.

The current optional qualitative Step 0, in which companies determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, will remain in place.

To discuss this year’s survey findings and the implications for financial preparers, the Financial Executives Research Foundation (FERF) spoke with Gary Roland, a Duff & Phelps Managing Director.

FERF: Can you describe some of the highlights of the results of this year’s survey?

Gary Roland: One of the primary goals of this study is to monitor the use of the qualitative Step 0 in the goodwill impairment test and how frequently companies are taking advantage of that. We've been asking that question for a number of years.

Until now, the use of Step 0 has been increasing steadily for both public and private companies. It peaked last year with 59 percent of public companies and 50 percent of private companies using Step 0, according to the 2016 survey.


In this year's survey, it dropped off a little bit. The public companies’ use fell from 59 to 52 percent, which is in line with the 2015 results. The private companies’ use dropped from 50 percent to 45 percent. So, in summary, there's been a distinct increase in the frequency of use of Step 0 over time as a general trend, and maybe a little settling out in this year's survey.

FERF: Any thoughts what may be influencing the consistent use of Step 0?

Roland: I think when Step 0 was first introduced in 2011, there may have been a lack of clarity around how it should be applied. Subsequently, the AICPA came out with guidance around how to perform a qualitative assessment under Step 0. Auditors also became more comfortable with the nature and the amount of work needed to be done to support the “more-likely-than-not” assertion of the qualitative Step 0 test, so there’s an enhanced level of comfort with that aspect of the test.

Also, to the extent that the market's done well and companies have produced favorable results in recent years, the prevalence of impairments may be reduced as compared to earlier. With that in place, it makes the qualitative assessment easier to use, and companies have greater confidence in the outcome.

On that same note, we've also taken note of respondents’ preference for using Step 1, which is the quantitative goodwill impairment test.

In 2015, that started at 45 percent for all respondents and it declined to 28 percent in 2016, and clicked up just a little bit to 31 percent this year. It seems that the preference for using a quantitative test has stabilized around 30 percent.


So, in very broad terms, almost a third of public company respondents and about half of private company respondents prefer using Step 1 as it might be easier to implement as part of their strategic planning process.

FERF:  Are there any industry preferences for using Step 0 versus Step 1?

Roland: We can say more broadly, companies that are in an industry sector that might be doing very well in the marketplace tend to believe they have a greater cushion when multiples of book value are higher. That may tend to encourage people to think more about using Step 0, rather than just looking to what their industry peers are doing. Market performance is a big factor in that decision.

FERF: Have we seen any effects from the elimination of Step 2 in the survey so far?

Roland: There were a number of questions that tried to gauge the degree to which companies were evaluating the potential impact of eliminating Step 2 now. It didn't seem that there was an overwhelming rush to evaluate the impact at this point in time.

A third of public companies and two-thirds of private companies in the study planned on not adopting the ASU that eliminates Step 2 until the respective effective dates.

Roughly two-thirds of public companies, and one-third of private companies, will consider adopting it before the effective date. A company’s current performance, and the mix of assets (including any unrecognized assets, and for the recognized assets, whether they have appreciated or depreciated in value) may have a bearing on the company’s desire to early adopt. It's hard to say without getting into the specifics of each particular company.

Regarding the ramifications of the ASU, 50 percent of respondents have not evaluated the impact of eliminating Step 2 on the frequency or the magnitude of their impairments. We tried to see if they had considered the potential effect of eliminating Step 2 on how often they might take an impairment, or the size of those impairments. Half of them haven't gotten to a point where they're evaluating. They know the ASU is there, but haven't fully focused on it.

About 70 percent of the respondents that actually have assessed the impact don't believe there's going to be much of an effect on the frequency or the magnitude of their impairments. People are forming very early opinions, but I'm not sure how much in-depth analysis has gone into that.

FERF: Have you talked to companies that are considering adopting it early? What are some of the factors that may go into that decision?

Roland: Eliminating Step 2 takes away a good deal of the cost associated with the goodwill impairment test by limiting the measure to the Step 1 analysis vs. the carrying amount. That ends the process there, should you elect to do that.

However, companies can get different outcomes if they apply Step 2 or if they don't.  First off, failing Step 1 will always result in a goodwill impairment under the new one-step test, which was not always the case under the two-step model. Second, the magnitude of any impairment can differ under a one-step test vs. the two-step test. This has a lot to do with the underlying assets that are sitting in the reporting unit. When you perform a Step 2 analysis, you determine the fair value of those assets, which would impact the amount of implied goodwill.  Compared to the two-step test, a higher impairment may result under the one-step test when the fair value of long-lived assets is below their carrying amount. And conversely, a lower impairment may result under the one-step test when there are significant unrecognized or appreciated intangible assets.

FERF: Have you talked to any companies that have started a transition effort yet?

Roland: We are entering the season now. Most companies tend to do their impairment testing in the third or fourth quarter as part of their annual planning timeframe, so unless there has been a triggering event or another need to test goodwill for impairment, many have not been faced with this decision. We’re in a transition at this point and people are evaluating whether to early adopt or to adopt the standard when they are required to.


Download the report here.