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Goodwill Impairment Testing — Simplification May Be Possible

Many organizations have goodwill on their balance sheets that is not being amortized for financial reporting purposes. Many years ago, accounting standards changed and organizations stopped amortizing goodwill (though it is still amortized for income tax purposes over a 15-year period). However, goodwill is subject to impairment testing. Topic 350 for the Financial Accounting Standards Board (FASB) Codification covers goodwill and other intangibles and has recently been updated. This update is intended to reduce complexity and costs by allowing certain organizations the option to make a qualitative evaluation about the likelihood of goodwill impairment.

This update attempts to simplify how goodwill is tested for impairment. However, it is important to note that impairment testing has not just disappeared. The update permits an organization to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the traditional two-step goodwill impairment test. Previous guidance required an organization to test goodwill for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). 

If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Because of changes made, an organization is not required to calculate the fair value of a reporting unit unless the applicable members of management (generally the CFO and his/her staff) determine that it is more likely than not that its fair value is less than its carrying amount. The update includes examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For example, if an acquisition has yielded strong cash flows since the date of purchase it may not be necessary to perform a detailed impairment test. However, management teams must consider a variety of facts and circumstances prior to making such a determination.

The update does not change the current guidance for testing other indefinite-lived intangible assets for impairment. However, on September 7, 2011, the FASB chairman added a separate project to the board’s short-term agenda to explore alternative approaches to the manner in which an entity tests other indefinite-lived intangible assets for impairment.

The update is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, early adoption is permitted, including for goodwill impairment tests performed as of a date before September 15, 2011, if an organization’s financial statements for the most recent period have not yet been issued or, for nonpublic organizations, have not yet been made available for issuance.

For further information, please contact Kevin Loudon at kloudon@BlackmanKallick.com or 312-980-3358 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.