Accountancy Rules
Valuation of Goodwill

PwC ... In brief: FASB proposes to simplify measurement of goodwill impairment

Burgess COMMENTARY

Peter Burgess

In brief: FASB proposes to simplify measurement of goodwill impairment 05/12/2016 Download: FASB proposes to simplify measurement of goodwill impairment

FASB proposed eliminating Step 2 of the current goodwill impairment test.

What happened?

On May 12, 2016, the FASB proposed eliminating Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure impairment loss. Under the proposal, goodwill impairment loss would instead be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. All other goodwill impairment guidance would remain unchanged.

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).

Current guidance

Under the current guidance, an entity has the option to first assess qualitative factors to determine whether a two-step goodwill impairment test is necessary (often referred to as “Step 0”). When an entity bypasses or fails Step 0, the two-step goodwill impairment test is performed. The first step (Step 1) of the goodwill impairment test compares a reporting unit’s fair value to its carrying amount to determine if an impairment exists. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the impairment test (Step 2) must be completed. Step 2 includes determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, if any.

Proposed guidance

Under the proposal, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss would be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

An entity would still have the option to do a qualitative assessment before proceeding to the quantitative goodwill impairment test. Further, 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).

Proposed transition

The proposed guidance would be applied prospectively to all existing goodwill. The effective date will be determined by the FASB in future redeliberations.

Why is this important?

The proposal would simplify financial reporting because it would eliminate the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. The amount of impairment recognized under the proposal could be larger or smaller than today largely depending on the difference between the carrying value and fair value of certain long-lived assets. For example, an entity with significant unrecognized intangible assets or significantly appreciated assets may recognize smaller impairment, whereas an entity with significant PP&E with carrying amounts in excess of fair value may recognize larger impairment than today. Additionally, while some companies may recognize no impairment today even when they fail Step 1, under the proposal, those companies would have to recognize some impairment amount.

The proposal would make US GAAP more similar to IFRS because IFRS also has a single step for goodwill impairment. However, other differences would remain.

What's next?

Comments on the proposal are due by July 11, 2016. The current proposal is the first phase of a broader project. In the second phase, the FASB plans to work concurrently with the IASB to consider whether additional changes to the subsequent accounting for goodwill should be made (for example, whether goodwill should be amortized).

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Business Combinations team in the National Professional Services Group (1-973-236-7801).

Authored by:

Lawrence Dodyk Partner Phone: 1-973-236-7213 Email: lawrence.dodyk@pwc.com

Andreas Ohl Partner Phone: 1-973-236-7721 Email: andreas.ohl@pwc.com

Daghan Or Partner Phone: 1-973-236-4966 Email: daghan.or@pwc.com

Chen Wu Senior Manager Phone: 1-973-236-4751 Email: wu.chen@pwc.com