Goodwill and Intangible Asset Impairment Testing (ASC Topic 350)

Under ASC Subtopic 350-20-35-1, goodwill and certain intangibles are not amortized; rather, these assets must be periodically tested for impairment under Accounting Standards Codification No. 350, Intangible-Goodwill and Other (ASC 350).

Under ASC Topic 350, companies must test their goodwill for impairment at three different points in time. The first is the transitional test, which was required at the beginning of the fiscal year in which ASC Topic 350 was adopted. In general, the valuation methods used for the transitional test must be consistent with all subsequent impairment testing. The second type of impairment testing is the interim test, which is required if certain “trigger events” occur, such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. Finally, companies must also perform annual tests for impairment. However, upon meeting certain criteria, some firms may not require a quantitative annual test.

This impairment test is performed in two steps.

Step1 – Comparison of reporting unit’s fair value with its carrying amount (book value).

Under Step 1, the fair value of a company’s reporting unit must be compared with its book value. If the fair value of the reporting unit is greater than its carrying amount, no impairment is deemed to exist. If the fair value of the reporting unit is less than its carrying amount, then the acquired goodwill is considered to be impaired and additional testing via Step 2 of the valuation test is necessary.

Step 2 – Goodwill Impairment Testing

For Step 2, an analysis similar to that prepared under ASC Topic 805 must be performed. In order to determine the implied fair value of the acquired goodwill, all assets must be appraised and, where appropriate, any identified long-lived assets are adjusted downward to their fair value. Once adjusted, the residual value of the reporting unit (implied goodwill) is compared to the recorded goodwill value and adjusted downward on the financial statements if impairment is indicated.

The current financial reporting environment finds regulators pursuing increased efforts to protect the investing public. This has led to new rules for the accounting of business combinations and greater scrutiny of compliance efforts. The professionals of Sigma Valuation Consulting possess knowledge of applicable regulatory requirements and specialize in the specific techniques associated with valuing business enterprises and their intangible assets.

Simplified Impairment Testing for Private Companies: Goodwill

On January 16, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-02,Intangibles-Goodwill and Other (Topic 350): Accounting for Goodwill. This ASU introduces an accounting alternative for private companies that simplifies and reduces the costs associated with the subsequent accounting for goodwill. The effects of a private company electing the accounting alternative as its accounting policy for goodwill include:

      • Amortizing goodwill over a period not to exceed 10 years instead of not amortizing it.
      • Choosing to test goodwill for impairment at either the entity level or the reporting unit level instead of having to test goodwill at the reporting unit level.
      • Testing goodwill for impairment only when there is a triggering event instead of testing it every year.
      • Testing and measuring goodwill for impairment by comparing the fair value of the entity (or reporting unit) to its carrying amount instead of performing a two-step goodwill impairment test that requires hypothetical business combination accounting for purposes of measuring an impairment loss.

If the accounting alternative is elected, all aspects of it must be elected. In other words, a private company cannot elect to apply the impairment guidance and not elect to apply the amortization guidance. While the ASU did not become effective until annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, early adoption is permitted. Prior to making the election, a private company needs to carefully consider the possibility of becoming, or being acquired by, a public business entity in the future, as discontinuing the election would currently require (absent additional standard setting) retrospective application of the legacy goodwill accounting model (i.e., the goodwill accounting model applicable to entities that cannot elect the accounting alternative). A private company also needs to be certain that the users of its financial statements will accept financial statements in which the accounting alternative has been applied.