On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2017- 04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies eliminates Step 2 of the goodwill impairment test, thereby simplifying the measurement of goodwill impairment. The revised guidance will be more similar to IFRS which also has a single-step goodwill impairment test.
Under the old guidance, as part of Step 2, an implied fair value of goodwill was computed, and an entity had to determine, at the impairment testing date, the fair value of its assets and liabilities requiring a hypothetical purchase price allocation.
Under the new guidance, an entity should perform its annual (or interim) goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss should not exceed the total amount of goodwill allocated to that reporting unit. An entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, as deemed necessary.
The one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. The FASB eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. So now the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
An entity continues to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The amendments in ASU 2017-04 are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. Private companies that have adopted the private company alternative for goodwill but not the private company alternative to subsume certain intangible assets into goodwill are permitted, but not required, to adopt ASU 2017-04 without having to justify preferability of the accounting change if it is adopted on or before the effective date. Private companies that have adopted the private company alternative to subsume certain intangible assets into goodwill, and, thus, also adopted the goodwill alternative, are not permitted to adopt the guidance upon issuance without following the guidance in FASB Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections, including justifying why it is preferable to change their accounting policies.
The revised guidance should be applied on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the ASU. A public business entity that is an SEC filer should adopt the amendments in ASU 2017-04 for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities that are adopting the amendments should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.