Goodwill Impairment Analysis Simplified with Removal of Step 2 Requirement
February 10, 2017
The Financial Accounting Standards Board (FASB) has amended the Accounting Standards Codification (ASC) Topic 350 related to the subsequent measurement of goodwill via Accounting Standards Update (ASU) 2017-04. Under the ASU, companies will no longer perform Step 2 of the goodwill impairment analysis. Instead, the entity or reporting unit will compare the fair value of the entity or reporting unit to its carrying amount just like in Step 1. The impairment charge, if any, is simply the lesser of (i) the difference between the fair value of the reporting unit and the carrying amount, or (ii) the remaining carrying amount of goodwill. The entity or reporting unit still has the option of performing a qualitative analysis to determine whether or not a quantitative test is needed (i.e. Step 0).
Although different filing entities have different dates after which they must adopt the new procedures, early adoption is permitted for all entities, including public business entities, for testing dates after January 1, 2017.
Companies and their stakeholders have pushed for many years to simplify the standards related to business combinations and subsequent measurement of goodwill due to concerns over complexity and cost. In response, FASB first introduced the alternative Private Company Council (PCC) Standards in 2014 for private companies, which reduced some of the complexity related to post-acquisition accounting and purchase price allocations. Furthermore, this should significantly reduce the cost and complexity of performing a goodwill impairment analysis for public and private companies that are not adopting the PCC alternative.
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