Public and private companies alike will soon be using a streamlined process for testing for goodwill impairment. The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update 2017-04, Intangibles—Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (ASU 2017-04). The ASU establishes a one-step process for testing goodwill for a drop in value.
The new rules call for a goodwill impairment loss to be measured as the excess of the reporting unit’s carrying amount over its fair value. It eliminates Step 2 that requires the impairment to be measured as the difference between the implied value of a reporting unit’s goodwill with the goodwill’s carrying amount.
Impact: In 2014, the FASB allowed private companies to use a simplified impairment model, and that move triggered the current action for public companies. Although the goodwill alternative was designed to cut the cost of compliance for private firms, it was believed that some would not elect to adopt it. That’s because, if they were acquired by a public company, they would have to undo the election and restate financial statements. This would mean little impact on valuation analysts. Now that public companies will use the same model, the restatement issue disappears, clearing the way for private-company adoption—and potentially more of a valuation impact.
The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers in 2020. Other public-business entities will have an additional year. All other entities that have not elected the private-company goodwill alternative are required to adopt in 2022. Special transition guidance is provided for private companies that have elected the private-company goodwill alternative. Early adoption is permitted for any impairment tests performed after Jan. 1, 2017.
The full text of the ASU is available here.
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