The FASB recently issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the accounting rules used by publicly traded companies for measuring goodwill impairment. Under existing rules, the measurement of goodwill impairment involves a two-step process. Step 1 entails comparing the fair value of an entity’s reporting unit to its carrying amount. If the reporting unit’s carrying amounts exceeds its fair value, the entity is then required to perform step 2. Under step 2, companies measure impairment losses by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recognized for the excess of the carrying amount over the fair value.
ASU 2017-04 simplifies this process by eliminating step 2 the goodwill impairment test for public business entities as well as not-for-profit entities.
What does this mean?
The step 2 calculations can be complex and costly. With the elimination of step 2, an entity measures goodwill impairment by simply comparing the fair value of each reporting unit with the carrying amount. An impairment charge should be recognized for the excess of the carrying amount over the reporting unit’s fair value. The loss cannot exceed the total amount of goodwill allocated to the reporting unit.
When is this effective?
A public entity that files with the SEC should adopt the amendments for its annual goodwill impairment tests beginning in fiscal years after December 15, 2019. Non-SEC filers must adopt for years beginning after December 15, 2020. Prospective application should be applied, and early adoption is permitted after January 1, 2017.