2.2 Testing Goodwill for Impairment
In testing goodwill for impairment, an entity may first elect to
perform a qualitative assessment (i.e., “step 0”) to determine whether it needs to
perform the quantitative goodwill impairment test (see Section 2.3). The entity may, however, also
elect to bypass the qualitative assessment and move directly to the quantitative
test (i.e., “step 1”). If the entity decides to perform the qualitative assessment
and determines that it is more likely than not (i.e., a likelihood of more than 50
percent) that goodwill might be impaired, the entity must proceed to step 1.
In step 1, the fair value of a reporting unit is compared with its carrying amount.
An entity recognizes a goodwill impairment loss when the carrying amount of a
reporting unit that includes goodwill exceeds its fair value; this amount is limited
to the amount of goodwill allocated to the reporting unit (see Section 2.4).
Before an entity can perform either a qualitative or a quantitative test, it must
first:
-
Identify its reporting units (Section 2.6).
-
Determine the carrying amount of each reporting unit by:
-
Assigning assets and liabilities to its reporting units (Section 2.7).
-
Assigning goodwill to reporting units (Section 2.8).
-
The flowchart below, reproduced from ASC 350-20-55-25, outlines the steps an entity
should follow in performing the goodwill impairment test.
ASC 350-20
55-25
The flowchart in this Example illustrates the optional
qualitative assessment and the quantitative goodwill
impairment test described in paragraphs 350-20-35-3A through
35-13.
Note 1: An entity has the unconditional
option to skip the qualitative assessment and proceed
directly to calculating the fair value of the reporting unit
and comparing that value with its carrying amount, including
goodwill.