Chapter 2 — Subsequent Accounting for Goodwill (After Adoption of ASU 2017-04)

2.10 Goodwill Impairment Testing by a Subsidiary

ASC 350-20

35-47 Subsidiary goodwill might arise from any of the following:

Acquisitions that a subsidiary made prior to its being acquired by the parent
Acquisitions that a subsidiary made subsequent to its being acquired by the parent
Goodwill arising from the business combination in which a subsidiary was acquired that the parent pushed down to the subsidiary’s financial statements.

35-48 All goodwill recognized by a public or nonpublic subsidiary (subsidiary goodwill) in its separate financial statements that are prepared in accordance with generally accepted accounting principles (GAAP) shall be accounted for in accordance with this Subtopic. Subsidiary goodwill shall be tested for impairment at the subsidiary level using the subsidiary’s reporting units. If a goodwill impairment loss is recognized at the subsidiary level, goodwill of the reporting unit or units (at the higher consolidated level) in which the subsidiary’s reporting unit with impaired goodwill resides must be tested for impairment if the event that gave rise to the loss at the subsidiary level would more likely than not reduce the fair value of the reporting unit (at the higher consolidated level) below its carrying amount (see paragraph 350-20-35-3C(f)). Only if goodwill of that higher-level reporting unit is impaired would a goodwill impairment loss be recognized at the consolidated level.

35-49 If testing at the consolidated level leads to an impairment loss, that loss shall be recognized at that level separately from the subsidiary’s loss.

When a consolidated entity has a subsidiary with recognized goodwill that issues separate U.S. GAAP financial statements, the subsidiary must perform goodwill impairment testing under ASC 350-20 as if it were a separate unconsolidated entity. Therefore, under ASC 350-20-35-48, the subsidiary must identify its CODM and segment managers. Because the subsidiary is often a subset of the parent’s operations, the individual (or group of individuals) who is the CODM for purposes of the subsidiary’s separate financial statements is often not the same CODM for the consolidated entity.

A parent and its subsidiary therefore perform goodwill impairment testing independently of each other. If the subsidiary recognizes a goodwill impairment loss in its separate financial statements, that loss is not recognized in the parent’s financial statements through consolidation. However, ASC 350-20-35-48 requires that the parent consider whether a goodwill impairment loss recognized in the subsidiary’s separate financial statements indicates that the goodwill of the reporting unit or units in which the subsidiary resides should be tested for impairment. If the goodwill impairment test at the consolidated level results in the recognition of an impairment loss, that loss is recognized in the consolidated financial statements and does not affect the amount of goodwill impairment loss recognized by the subsidiary in its separate financial statements. Therefore, the parent and the subsidiary could each recognize different amounts for goodwill impairment losses, resulting in an ongoing consolidation adjustment.

It is possible that (1) the reporting units identified by the parent and the subsidiary could be the same and (2) the amount of goodwill assigned to those reporting units is the same. In that case, the goodwill impairment testing performed at the subsidiary level may be the same as that performed by the parent. Thus, any goodwill impairment loss could be the same amount, though often this is not the case.

It can be challenging to test goodwill at the subsidiary level because of differences between the parent’s and subsidiary’s identification of reporting units, the amount of goodwill assigned to reporting units, and whether the subsidiary has elected pushdown accounting. The example below contains scenarios (not all-inclusive) illustrating some of the challenges entities could encounter.

Example 2-15

Company A acquires Company B in a business combination. Company A retains B as a separate subsidiary, which is required to issue separate financial statements. Company A recognizes goodwill of $200 from the acquisition of B in its consolidated financial statements.

Scenario 1

Company A determines that B represents a single reporting unit in accordance with ASC 350-20 and assigns $200 of goodwill to this reporting unit. Company B elects to apply pushdown accounting and recognizes $200 of goodwill in its separate financial statements. Company B determines that for purposes of its separate financial statements, it has three reporting units. Therefore, B will allocate the $200 in goodwill among its three reporting units and will use those reporting units to test the goodwill. If B identifies a goodwill impairment in one or more of its reporting units, A must consider whether the event that gave rise to the loss at B would more likely than not reduce the fair value of the B reporting unit at the A consolidated level below its carrying amount.

Scenario 2

Company A determines that B represents a single reporting unit in accordance with ASC 350-20. On the basis of the expected synergies from the acquisition of B, A assigns $150 of the $200 of recognized goodwill to Reporting Unit B and $50 to Reporting Unit X, a different reporting unit of A. For purposes of A’s consolidated financial statements, when A tests its B reporting unit for impairment, it will test goodwill of $150, which was the amount assigned to the B reporting unit.

Company B elects to apply pushdown accounting and recognizes $200 of goodwill in its separate financial statements because that was the amount resulting from the acquisition of B. Company B determines that for purposes of its separate financial statements, B has three reporting units. Therefore, B will allocate the $200 in goodwill among its three reporting units and will use those three reporting units to test the goodwill. If B identifies a goodwill impairment in one or more of its reporting units, A must consider whether the event that gave rise to the loss at B would more likely than not reduce the fair value of the B reporting unit at the A consolidated level below its carrying amount.

Scenario 3

Company A determines that B represents a single reporting unit in accordance with ASC 350-20 and assigns $200 of goodwill to the B reporting unit. Company B elects not to apply pushdown accounting.

Company B has no recorded goodwill in its separate financial statements and therefore is not required to perform goodwill impairment testing. Company A performs goodwill impairment testing at the B reporting unit level.

Scenario 4

Assume the same facts as in Scenario 3 except that, while B elects to not apply pushdown accounting, it has recognized goodwill of $75 in connection with a prior acquisition of an entity. Company B will use its reporting units to test the $75 in goodwill for impairment, and A will test the $200 of goodwill from its acquisition of B for impairment at the B reporting unit level.

The scenarios in the example above illustrate that entities must carefully analyze the facts in determining when the reporting units of a subsidiary must be identified and when goodwill must be assigned and therefore tested for impairment at the subsidiary level.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.