Noteworthy Development: FASB Issues ASU 2011-08, Testing Goodwill for Impairment

In an effort to reduce the cost and complexity of performing the first step of the two step goodwill impairment test as currently required by Topic 350, Intangibles – Goodwill and Other, the FASB issued Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment.  The update outlines amendments to Topic 350, dubbed Step Zero, which would permit an entity to qualitatively assess whether the fair value of a reporting unit is less than its carrying amount.  The FASB’s amendments apply to public as well as non-public entities, are subject to early adoption and would be effective for fiscal years beginning after December 15, 2011.

Based on a qualitative assessment, if the entity determines that it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the entity must perform step one of the goodwill impairment test.  Or, the entity has the option to forgo the qualitative assessment and simply perform step one.  Under the new test, if the entity determines that events and circumstances indicate that its fair value is not less than its carrying value using a more likely than not criteria (>50%), then no further testing is required.

The qualitative factors outlined in ASU 2011-08 are not intended to be all-inclusive and are not intended to represent stand-alone events or circumstances that would require the entity to perform the first step of the impairment test.  In addition, an entity should consider positive and mitigating events and circumstances that may affect its conclusion.   Examples of events and circumstances that would require assessment are:

  • General macroeconomic conditions
    • Deterioration in general economic conditions
    • Limitations accessing capital
    • Fluctuations in foreign exchange rates
    • Other developments in equity and credit markets
  • Industry and market considerations
    • Deterioration in the operating environment
    • Increased competition
    • A decline in market-dependent multiples
    • A change in the market for the entity’s products or services
    • A regulatory or political development
  • Cost factors that have a negative effect on earnings
    • Increases in raw materials, labor or other costs
  • Decline in overall financial performance
    • Negative or declining cash flows
    • A decline in actual or planned revenues or earnings
  • Entity-specific events
    • Changes in management or key personnel
    • Changes in strategy or customers
    • Bankruptcy or litigation
  • Events affecting a reporting unit
    • A change in the carrying amount of net assets (write offs)
    • Plans to sell or dispose of a portion or all of a reporting unit
    • Testing for recoverability of a significant asset group within a reporting unit
    • Recognition of goodwill impairment in a component of the reporting unit
  • A sustained decrease in share price, both absolutely and relative to peers

The examples of events and circumstances in ASU 2011-08 would replace existing qualitative factors in FASB ASC 350 that entities must currently consider between annual impairment tests and when the carrying amount of a reporting unit is zero or negative.

In a concurrent action, the FASB announced that it would add a new short-term impairment testing project to its agenda for indefinite lived intangible assets.  The purpose of the new project is to explore alternative impairment testing approaches for intangible assets subject to amortization

To download ASU 2011-08, Testing Goodwill for Impairment, go to http://www.fasb.org.  Select the “Standards” tab, and then choose “Accounting Standards Updates.”

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