2.11 Disposal of All or a Portion of a Reporting Unit
ASC 350-20
40-1
When a reporting unit is to be disposed of in its entirety,
goodwill of that reporting unit shall be included in the
carrying amount of the reporting unit in determining the
gain or loss on disposal.
40-2
When a portion of a reporting unit that constitutes a
business (see Section 805-10-55) or nonprofit activity is to
be disposed of, goodwill associated with that business or
nonprofit activity shall be included in the carrying amount
of the business or nonprofit activity in determining the
gain or loss on disposal.
40-3
The amount of goodwill to be included in that carrying
amount shall be based on the relative fair values of the
business or nonprofit activity to be disposed of and the
portion of the reporting unit that will be retained. For
example, if a reporting unit with a fair value of $400 is
selling a business or nonprofit activity for $100 and the
fair value of the reporting unit excluding the business or
nonprofit activity being sold is $300, 25 percent of the
goodwill residing in the reporting unit would be included in
the carrying amount of the business or nonprofit activity to
be sold.
40-4
However, if the business or nonprofit activity to be
disposed of was never integrated into the reporting unit
after its acquisition and thus the benefits of the acquired
goodwill were never realized by the rest of the reporting
unit, the current carrying amount of that acquired goodwill
shall be included in the carrying amount of the business or
nonprofit activity to be disposed of.
40-5
That situation might occur when the acquired business or
nonprofit activity is operated as a standalone entity or
when the business or nonprofit activity is to be disposed of
shortly after it is acquired.
40-6
Situations in which the acquired business or nonprofit
activity is operated as a standalone entity are expected to
be infrequent because some amount of integration generally
occurs after an acquisition.
40-7
When only a portion of goodwill is allocated to a business
or nonprofit activity to be disposed of, the goodwill
remaining in the portion of the reporting unit to be
retained shall be tested for impairment in accordance with
paragraphs 350-20-35-3A through 35-13 using its adjusted
carrying amount.
Under ASC 350-20-40-1, if one or more reporting units are being disposed of in their
entirety, the entity is not subject to an allocation process because the amount of
goodwill that had already been assigned to the reporting units for goodwill
impairment testing is included in the carrying amount of the disposal group in the
determination of the gain or loss on the disposition. Further, ASC 350-20-35-3C(f)
states that when there is “a more-likely-than-not expectation of selling or
disposing of all, or a portion, of a reporting unit,” an entity would be required to
consider whether goodwill should be tested for impairment between annual testing
dates. Any impairment would be recognized as it normally would under ASC 350-20.
Example 2-16
Company A acquires Company B in a business
combination. Company A retains B as a separate subsidiary,
and B elects to apply pushdown accounting in its separate
financial statements. Company A recognizes goodwill of $200
from the acquisition of B in its consolidated financial
statements. In applying pushdown accounting, B recognizes
$200 of goodwill in its separate financial statements.
Company A determines that B represents a separate 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 B and $50 to
Subsidiary X, a different reporting unit of A.
If A were to dispose of B in its entirety, A would only
include the $150 of assigned goodwill in determining the
gain or loss on the disposal of B. To appropriately account
for the gain or loss on disposal in its consolidated
financial statements, A would therefore need to make an
adjustment at the consolidated level to exclude $50 of
goodwill assigned to X from the disposed assets. Similarly,
if A were to dispose of X in its entirety, A would include
the assigned goodwill amount of $50 in calculating the gain
or loss on the disposal of X. To appropriately account for
the gain or loss on disposal, A would therefore need to make
an adjustment at the consolidated level to include the $50
of goodwill assigned to X with X’s disposed assets.
When only a portion of a reporting unit is being disposed of, the entity must
determine how much goodwill should be included in the carrying amount of the
disposal group to determine the gain or loss on disposal.
If the portion of the reporting unit to be disposed of does not meet the definition
of a business in ASC 805-10, goodwill should not be allocated to the disposal group
because goodwill is only derecognized when a business is disposed of (or when
goodwill is impaired). We believe that if an entity disposes of a portion of a
reporting unit that does not meet the definition of a business and, accordingly, no
goodwill is allocated to the disposal, the entity should, if the disposition is
significant, assess whether the goodwill remaining in the reporting unit might be
impaired.
If the portion of the reporting unit to be disposed of meets the definition of a
business in ASC 805-10 or is a nonprofit activity, an entity must determine the
amount of goodwill to include in the carrying amount to determine the gain or loss
on disposal. See Section 2.4 of Deloitte’s
Roadmap Business Combinations for more
information about determining whether the portion to be disposed of meets the
definition of a business.
ASC 350-20-40-3 through 40-6 provide guidance on determining the amount of goodwill
to be included in the carrying amount. We believe that entities should generally
apply the guidance in ASC 350-20-40-3, which requires that “[t]he amount of goodwill
to be included in that carrying amount shall be based on the relative fair values of the business or nonprofit activity to be disposed of and the portion of the reporting unit that will be retained.” Paragraph B165 of Statement 142 describes the
FASB’s rationale for this requirement:
The Board considered various allocation
approaches, recognizing that any allocation approach would be arbitrary. The
Board agreed that this Statement [Statement 142] should prescribe use of a
specific allocation method such that the amount of goodwill allocated to a
business to be disposed of would be determined consistently from entity to
entity. The Board concluded that a relative-fair-value allocation method would
result in a reasonable estimation of the amount of goodwill that might be
associated with a business being disposed of and would not be overly complex to
apply. Therefore, this Statement requires that when a portion of a reporting
unit being disposed of constitutes a business, the amount of goodwill assigned
to that business should be based on the relative fair values of the business to
be disposed of and the remaining portion of the reporting unit.
The example below illustrates application of the relative fair value allocation
method.
Example 2-17
While we believe that the relative fair value allocation method should be used in
most circumstances, ASC 350-20-40-4 states that “if the business or nonprofit
activity to be disposed of was never integrated into the reporting unit after its
acquisition and thus the benefits of the acquired goodwill were never realized by
the rest of the reporting unit, the current carrying amount of that acquired
goodwill shall be included in the carrying amount of the business or nonprofit
activity to be disposed of.” ASC 350-20-40-5 goes on to say that this “situation
might occur when the acquired business or nonprofit activity is operated as a standalone entity or when the business or nonprofit activity is to be disposed of shortly after it is acquired.” Paragraph B166 of FASB Statement 142 describes the
rationale for allowing use of the current carrying amount of acquired goodwill in
limited circumstances:
The Board observed that when an acquired business is being
disposed of and the benefits of goodwill acquired with that business have not
been realized by any portion of the reporting unit other than the acquired
business, the carrying amount of that acquired goodwill should be included in
the net assets disposed of. Therefore, this Statement requires that the
relative-fair-value allocation method not be used to allocate goodwill to a
business being disposed of if that business was not integrated into the
reporting unit after its acquisition. Board members noted that those situations
(such as when the acquired business is operated as a stand-alone entity) would
be infrequent because some amount of integration generally occurs after an
acquisition.
The determination of whether the business to be disposed of has never been integrated
depends on the entity’s specific facts and circumstances. Entities must use
significant judgment in making this determination and should consider factors such
as how long the business has been owned; the extent of shared services, corporate
functions, and assets; and the level of management oversight and interaction.
When only a portion of a reporting unit is being disposed of, an entity should assess
whether the goodwill assigned to the disposal group is impaired in accordance with
ASC 350-20-35-3C(f). That is, once assets (including goodwill) are assigned to a
disposal group, the disposal group effectively becomes its own reporting unit and
the decision to sell or otherwise dispose of a portion of that unit would most
likely represent an event triggering the requirement to assess the goodwill of the
disposal group for impairment. Any impairment is recognized as it normally would be
under ASC 350-20.
In addition, under ASC 350-20-40-7, “[w]hen only a portion of goodwill is allocated
to a business or nonprofit activity to be disposed of, the goodwill remaining in the
portion of the reporting unit to be retained shall be tested for impairment in
accordance with paragraphs 350-20-35-3A through 35-13.”
Connecting the Dots
In January 2017, the FASB issued ASU 2017-01 to clarify
the definition of a business. As expected at the time of the ASU’s issuance,
some transactions that would have been accounted for as business
combinations under previous guidance are being accounted for as asset
acquisitions after an entity adopts ASU 2017-01. When determining whether
goodwill should be allocated to a disposal of a portion of a reporting unit,
entities should apply the definition of a business, as clarified in ASU
2017-01, regardless of whether the assets disposed of were acquired and
determined to be a business under previous guidance.
See Section 2.5.6.2 of this Roadmap and
Section
3.4.1 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived
Assets and Discontinued Operations for more information about
the order of impairment testing when a disposal group is classified as held for
sale.
See Section
11.3.2.5 of Deloitte’s Roadmap Income Taxes for information
about the tax implications of disposing of goodwill.
2.11.1 Carve-Out Financial Statements
“Carve-out financial statements” is a general term used to describe financial
statements derived from the financial statements of a larger parent entity to
reflect a portion of a parent entity’s balances and activities. Carve-out
financial statements are often prepared when a parent entity wishes to pursue a
sale, spin-off, IPO, or sale transaction involving a portion of the parent
entity.
If the parent entity has recorded goodwill and if the carve-out entity
constitutes a business as defined in ASC 805-10, management must use a
reasonable approach to determine the amount of goodwill to include in the
carve-out financial statements. See Section 2.2 of Deloitte’s
Roadmap Carve-Out
Financial Statements for information about allocating
goodwill to carve-out financial statements and goodwill impairment
considerations.
2.11.2 Spin-Offs
The ASC master glossary defines a spin-off as the “transfer of assets that
constitute a business by an entity (the spinnor) into a new legal spun-off
entity (the spinnee), followed by a distribution of the shares of the spinnee to
its shareholders, without the surrender by the shareholders of any stock of the
spinnor.”
The amount of goodwill assigned to the spinnee by the parent (i.e., the spinnor)
in the consolidated financial statements may differ from the amount of goodwill
recognized by the spinnee in its separate financial statements.
We believe that the parent should apply the guidance in ASC 350-20-40-1 through
40-7 on determining the amount of goodwill to assign to the spinnee;
accordingly, a relative fair value allocation approach generally would be
required (see Section 2.11.) By contrast, the amount of goodwill recognized by
the spinnee in its separate financial statements may be based, in whole or in
part, on specific identification. (See Section 2.11.1 of this Roadmap
and Section
2.2 of Deloitte’s Roadmap Carve-Out Financial
Statements for information about allocating goodwill to
carve-out financial statements.)
2.11.3 Transactions Between Entities Under Common Control
See Section
B.3.2.3 of Deloitte’s Roadmap Business Combinations for
information about determining the amount of goodwill to include in a transfer
between entities under common control. Also see Section B.3.3.2 of that Roadmap
for information about considerations related to reorganizations of reporting
structure and goodwill impairment testing when an entity undergoes a
common-control transaction.