FASB goodwill impairment update may increase cost, complexity for some reporting units

BVWireIssue #109-1
October 5, 2011

In its just-released Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, the FASB amends ASC 350 to allow entities to “qualitatively assess whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount,” says the Valuation Research Corporation. If it is “more–likely-than-not” that the fair value of the reporting unit is less than its carrying amount, then the entity would proceed with step one of ASC 350’s two-step goodwill impairment test. However, if a review of qualitative factors indicates that the reporting unit will clear the “more-likely-than-not” hurdle and its fair value exceeds its carrying value, then “no further fair value measurement needs be performed,” say VRC analysts.

“FASB has reduced the complexity of the goodwill impairment testing process with this ruling for certain entities that have reporting units with significant differences between fair value and their carrying amounts,” adds P.J. Patel, VRC senior vice president. “However, it is important to note that for entities that have a significant cushion, the ability to qualitatively assess a reporting unit for goodwill impairment prior to commencing a fair value-based test already existed under ASC 350. The qualitative assessment, together with a more-likely-than-not threshold, should reduce the complexity and cost of goodwill impairment testing for these entities that have a significant cushion. But for those entities with [less] cushion, the new standard can result in the qualitative step providing unclear direction, and perhaps more auditor scrutiny.”

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