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

2.6 Identification of Reporting Units

ASC 350-20

35-33 The provisions of Topic 280 shall be used to determine the reporting units of an entity.

35-34 A component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component. Subtopic 805-10 includes guidance on determining whether an asset group constitutes a business. Throughout the remainder of this Section, the term business also includes a nonprofit activity.

35-35 However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Paragraph 280-10-50-11 shall be considered in determining if the components of an operating segment have similar economic characteristics.

35-36 An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if it comprises only a single component.

35-37 Reporting units will vary depending on the level at which performance of the segment is reviewed, how many businesses the operating segment includes, and the similarity of those businesses. In other words, a reporting unit could be the same as an operating segment, which could be the same as a reportable segment, which could be the same as the entity as a whole (entity level).

35-38 An entity that is not required to report segment information in accordance with Topic 280 is nonetheless required to test goodwill for impairment at the reporting unit level. That entity shall use the guidance in paragraphs 280-10-50-1 through 50-9 to determine its operating segments for purposes of determining its reporting units.

The ASC master glossary defines a reporting unit as “the level of reporting at which goodwill is tested for impairment. A reporting unit is an operating segment or one level below an operating segment (also known as a component).” Therefore, before an entity can test goodwill for impairment, it must identify its reporting units. It is important for an entity to clearly distinguish among reportable segments, operating segments, and reporting units. ASC 280 addresses reportable and operating segments, while ASC 350 addresses reporting units.

The determination of reporting units under ASC 350 begins with the definition of an operating segment (not a reportable segment) in ASC 280 and takes into account the disaggregation of that operating segment into economically dissimilar components for goodwill impairment testing purposes. An operating segment is the highest level within an entity that can be a reporting unit. Therefore, an entity must have at least as many reporting units as it has operating segments. Some entities may meet the criteria in ASC 280 to aggregate some or all of their operating segments into one or more reportable segments. However, reporting units cannot be at a higher level than an operating segment. In addition, there may be instances in which an entity has only one operating segment and concludes that it has only one reporting unit. In these cases, goodwill is tested for impairment at the entity level.

A component is the lowest level within an entity that can be a reporting unit. ASC 350-20-35-34 states, in part, that “a component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component.”

Like operating segments, reporting units are identified on the basis of how the entity is managed rather than the entity’s legal entity structure. Therefore, if the entity is not managed on the basis of its legal entity structure, a reporting unit could contain parts of different legal entities. This situation may occur, for example, if subsidiaries are legal reporting entities solely for tax purposes.

The level at which operating performance is reviewed under ASC 280 may differ from that under ASC 350. The chief operating decision maker (CODM) reviews operating segments, while the segment manager reviews reporting units (components of operating segments). Therefore, a component would not be considered an operating segment under ASC 280 unless the CODM regularly reviews its operating performance. However, that same component might be a reporting unit under ASC 350 if a segment manager regularly reviews its operating performance (and if the other reporting unit criteria are met). The graphic below illustrates the interaction between reportable segments, operating segments, reporting units, and components.

To identify its reporting units, an entity should perform the following steps:

Step 1: Identify the operating segments in accordance with ASC 280 (see Section 2.6.1).
Step 2: Identify the components of each operating segment and determine whether each component meets the definition of a reporting unit (see Section 2.6.2).
Step 3: Aggregate components that have similar economic characteristics (see Section 2.6.3).

2.6.1 Step 1 — Identify the Operating Segments

An entity’s first step in identifying its reporting units is to identify its operating segments in accordance with ASC 280. The entity identifies its operating segments by using the management approach described in ASC 280-10-05-3, which is “based on the way that management organizes the segments within the public entity for making operating decisions and assessing performance.” As indicated in ASC 280-10-50-1, “[a]n operating segment is a component of a public entity that has all of the following characteristics:

It engages in business activities from which it may recognize revenues and incur expenses . . .
Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
Its discrete financial information is available.”

An entity may need to use judgment when evaluating whether a component has all the characteristics of an operating segment.

As discussed above, an entity’s operating segments are not necessarily the same as its reportable segments. The guidance in ASC 280 permits entities to aggregate operating segments into one or more reportable segments if the criteria in ASC 280 are met. However, an operating segment is the highest level within an entity that can be a reporting unit. Therefore, the entity must have at least as many reporting units as it has operating segments.

Connecting the Dots

While only public entities need to provide the segment disclosures required by ASC 280, other entities apply the guidance in ASC 280 to identify their reporting units. ASC 350-20-35-38 states:

An entity that is not required to report segment information in accordance with Topic 280 is nonetheless required to test goodwill for impairment at the reporting unit level. That entity shall use the guidance in paragraphs 280-10-50-1 through 50-9 to determine its operating segments for purposes of determining its reporting units.

See Chapter 2 of Deloitte’s Roadmap Segment Reporting for additional details on the identification of operating segments.

2.6.2 Step 2 — Identify the Components of Each Operating Segment and Determine Whether Each Component Meets the Definition of a Reporting Unit

ASC 350-20

Implementation Guidance

55-1 Determining whether a component of an operating segment is a reporting unit is a matter of judgment based on an entity’s individual facts and circumstances. Although paragraphs 350-20-35-33 through 35-35 includes a number of characteristics that must be present for a component of an operating segment to be a reporting unit, no single factor or characteristic is determinative. How an entity manages its operations and how an acquired entity is integrated with the acquiring entity are key to determining the reporting units of the entity.

55-2 The characteristics identified in paragraphs 350-20-35-33 through 35-35 that must be present for a component to be a reporting unit are discussed in the following implementation guidance.

ASC 350-20-35-34 states, in part, that a “component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component.”

2.6.2.1 Step 2(a) — Determine Whether the Component Constitutes a Business

ASC 350-20

55-3 The determination of whether a component constitutes a business or a nonprofit activity requires judgment based on specific facts and circumstances. The guidance in Section 805-10-55 should be considered in determining whether a group of assets constitutes a business or a nonprofit activity.

ASC 350-20-55-3 indicates that an entity must use judgment in assessing “whether a component constitutes a business or a nonprofit activity.” For more information about determining whether a component constitutes a business, see ASC 805-10-55 as well as Section 2.4 of Deloitte’s Roadmap Business Combinations.

Connecting the Dots

ASC 280-10-50-1 states that to qualify as an operating segment, a component must engage “in business activities from which it may recognize revenues and incur expenses,” but it does not need to meet the definition of a business in ASC 805. On the other hand, if the operating segment is disaggregated into multiple reporting units, each component must meet the definition of a business in ASC 805 to be a reporting unit; otherwise, the components should be aggregated (1) until they meet the definition of a business and qualify as a reporting unit or (2) to the operating segment level.

2.6.2.2 Step 2(b) — Determine Whether Discrete Financial Information Is Available for the Component

ASC 350-20

55-4 The term discrete financial information should be applied in the same manner that it is applied in determining operating segments in accordance with paragraph 280-10-50-1. That guidance indicates that it is not necessary that assets be allocated for a component to be considered an operating segment (that is, no balance sheet is required). Thus, discrete financial information can constitute as little as operating information. Therefore, in order to test goodwill for impairment in accordance with this Subtopic, an entity may be required to assign assets and liabilities to reporting units (consistent with the guidance in paragraphs 350-20-35-39 through 35-40).

Another characteristic of an operating segment is the availability of discrete financial information. While ASC 280 does not define the term “discrete financial information,” we believe that such information generally includes some measure of a component’s profitability that can be readily distinguished from that of the organization’s other components. In addition, ASC 350-20-55-4 indicates that assets and liabilities do not need to be assigned at the component level for the component to constitute a reporting unit (i.e., a balance sheet is not necessary for a component to qualify as a reporting unit). However, even though the entity may not assign assets and liabilities to the component for internal reporting purposes, if the component qualifies as a reporting unit, the entity will need to assign to that reporting unit the assets and liabilities that (1) are used in, or related to, the unit’s operations and (2) the entity would use to determine the fair value of the reporting unit when performing step 1 of the goodwill impairment test. The existence of numerous shared assets or other resources could indicate that the component is not itself a business under ASC 805 or that it should be aggregated with one or more other components (within the same operating segment) because the components are economically similar.

See Section 2.4 of Deloitte’s Roadmap Segment Reporting for more information about what constitutes discrete financial information.

2.6.2.3 Step 2(c) — Determine Whether Segment Management Regularly Reviews the Operating Results of the Component

ASC 350-20

55-5 Segment management, as defined in paragraphs 280-10-50-7 through 50-8, is either a level below or the same level as the chief operating decision maker. According to Topic 280, a segment manager is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. The approach used in this Subtopic to determine reporting units is similar to the one used to determine operating segments; however, this Subtopic focuses on how operating segments are managed rather than how the entity as a whole is managed; that is, reporting units should reflect the way an entity manages its operations.

ASC 280-10-50-7 and 50-8 further clarify the meaning of the term “segment manager”:

50-7 Generally, an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. The term segment manager identifies a function, not necessarily a manager with a specific title.

50-8 The chief operating decision maker also may be the segment manager for certain operating segments. A single manager may be the segment manager for more than one operating segment. If the characteristics in paragraphs 280-10-50-1 and 280-10-50-3 apply to more than one set of components of a public entity but there is only one set for which segment managers are held responsible, that set of components constitutes the operating segments.

Understanding an entity’s organizational structure is important to the identification of its segment managers, including which individuals directly report to, and how they interact with, the CODM. The segment manager is generally a level below, and someone who works closely with, the CODM. Further, because a reporting unit is often a component of an operating segment, the information reviewed by segment management can differ from that reviewed by the CODM.

While ASC 280 does not define “regularly reviewed,” we believe that, for most public entities, a regular review would be performed on at least a quarterly basis. However, an entity should use judgment in determining which operating results are regularly reviewed by segment management.

See Section 2.3.2.3.1 of Deloitte’s Roadmap Segment Reporting for more information about identifying the segment manager.

2.6.3 Step 3 — Aggregate Components That Have Similar Economic Characteristics

ASC 350-20

55-6 Evaluating whether two components have similar economic characteristics is a matter of judgment that depends on specific facts and circumstances. That assessment should be more qualitative than quantitative.

55-7 In determining whether the components of an operating segment have similar economic characteristics, all of the factors in paragraph 280-10-50-11 should be considered. However, every factor need not be met in order for two components to be considered economically similar. In addition, the determination of whether two components are economically similar need not be limited to consideration of the factors described in that paragraph. In determining whether components should be combined into one reporting unit based on their economic similarities, factors that should be considered in addition to those in that paragraph include but are not limited to, the following:

The manner in which an entity operates its business or nonprofit activity and the nature of those operations
Whether goodwill is recoverable from the separate operations of each component business (or nonprofit activity) or from two or more component businesses (or nonprofit activities) working in concert (which might be the case if the components are economically interdependent)
The extent to which the component businesses (or nonprofit activities) share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms
Whether the components support and benefit from common research and development projects.

The fact that a component extensively shares assets and other resources with other components of the operating segment may be an indication that the component either is not a business or nonprofit activity or it may be economically similar to those other components.

A component of an operating segment, which is a business for which discrete financial information is available and segment management regularly reviews the component’s operating results, must be aggregated and deemed a single reporting unit if the components have similar economic characteristics. While an entity can choose not to aggregate operating segments into reportable segments under ASC 280-10-50-18A, the entity is required to aggregate components with similar economic characteristics into reporting units under ASC 350-20. Paragraph B111 of the Background Information and Basis for Conclusions of FASB of Statement 142 clarifies the Board’s rationale for requiring aggregation of components and states:

The Board reasoned that the benefits of goodwill would be shared by components of an operating segment that have similar economic characteristics and that requiring goodwill to be allocated among components with similar economic characteristics would be arbitrary and unnecessary for purposes of impairment testing.

In determining whether components have similar economic characteristics, an entity considers the same factors in ASC 280-10-50-11 that are used to assess whether operating segments may be aggregated. ASC 280-10-50-11 states:

Operating segments often exhibit similar long-term financial performance if they have similar economic characteristics. For example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics were similar. Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of this Subtopic, if the segments have similar economic characteristics, and if the segments are similar in all of the following areas (see paragraphs 280-10-55-7A through 55-7C and Example 2, Cases A and B [paragraphs 280-10-55-33 through 55-36]):

The nature of products and services
The nature of the production processes
The type of class or customer for their products and services
The methods used to distribute their products or provide their services
If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

In addition, ASC 350-20-55-7 (see above) lists additional factors that an entity may consider in determining whether components should be combined into a reporting unit.

Connecting the Dots

In aggregating reporting units, an entity considers the same criteria as it does when aggregating operating segments into reportable segments (see Section 3.2 of Deloitte’s Roadmap Segment Reporting for further details). However, unlike operating segments, reporting units do not need to meet all of these criteria “to be considered economically similar” in accordance with ASC 350-20-55-7. Therefore, two or more reporting units do not have to possess all of the characteristics in ASC 280-10-50-11 to be aggregated. Further, a quantitative assessment of similar economic characteristics is critical to the overall aggregation conclusion when an entity is aggregating operating segments. Under ASC 350-20-55-6, the assessment related to aggregation of reporting units “should be more qualitative than quantitative.” Therefore, we believe that, in the aggregation evaluation, it is possible for reporting units to be economically similar and to have larger ranges of profitability measures than operating segments. In addition, because there are no “bright lines” in the evaluation of whether two or more reporting units possess similar economic characteristics, an entity will need to use judgment in performing this evaluation.

See Section 3.2 of Deloitte’s Roadmap Segment Reporting for additional details on evaluating the aggregation criteria.

2.6.3.1 No Aggregation Across Operating Segments

ASC 350-20

55-8 Components that share similar economic characteristics but relate to different operating segments may not be combined into a single reporting unit. For example, an entity might have organized its operating segments on a geographic basis. If its three operating segments (Americas, Europe, and Asia) each have two components (A and B) that are dissimilar to each other but similar to the corresponding components in the other operating segments, the entity would not be permitted to combine component A from each of the operating segments to make reporting unit A.

ASC 350-20-55-8 clarifies that “[c]omponents that share similar economic characteristics but relate to different operating segments may not be combined into a single reporting unit.” Therefore, components cannot be aggregated across operating segments, even if those operating segments qualify for aggregation into a reportable segment. Entities that identify segments on the basis of geographic areas may be particularly affected, since such entities cannot aggregate components from different geographic operating segments even if those components are economically similar.

2.6.3.2 Economically Dissimilar Operating Segments That Are Aggregated Into a Reportable Segment

ASC 350-20

55-9 If two operating segments have been aggregated into a reportable segment by applying the aggregation criteria in paragraph 280-10-50-11, it would be possible for one or more of those components to be economically dissimilar from the other components and thus be a reporting unit for purposes of testing goodwill for impairment. That situation might occur if an entity’s operating segments are based on geographic areas. The following points need to be considered in addressing this circumstance:

The determination of reporting units under this Subtopic begins with the definition of an operating segment in paragraph 280-10-50-1 and considers disaggregating that operating segment into economically dissimilar components for the purpose of testing goodwill for impairment. The determination of reportable segments under Topic 280 also begins with an operating segment, but considers whether certain economically similar operating segments should be aggregated into a single operating segment or into a reportable segment.
The level at which operating performance is reviewed differs between this Subtopic and Topic 280. It is the chief operating decision maker who reviews operating segments and the segment manager who reviews reporting units (components of operating segments). Therefore, a component of an operating segment would not be considered an operating segment for purposes of that Topic unless the chief operating decision maker regularly reviews its operating performance; however, that same component might be a reporting unit under this Subtopic if a segment manager regularly reviews its operating performance (and if other reporting unit criteria are met).

Meeting the criteria to aggregate operating segments into reportable segments is considered a higher hurdle than meeting the criteria to aggregate components into reporting units. Therefore, some constituents have questioned whether, when an entity has aggregated two operating segments into a reportable segment, one or more of the components of those operating segments can qualify as reporting units. ASC 350-20-55-9 clarifies which operating segments would qualify as reporting units.

2.6.4 Reassessment of Aggregation Criteria for Reporting Units

As discussed in Section 2.9, an entity that reorganizes its reporting structure may need to reassess its reporting units. However, the guidance in ASC 350-20 does not specify whether an entity should reassess whether its components continue to meet, or no longer meet, the criteria for aggregation on the basis of similar economic characteristics. We believe that an entity may need to reassess its reporting units because of significant changes in the economic characteristics of components and, as a result, would either aggregate or disaggregate components. If the entity’s reporting units change as a result of that reassessment, goodwill should be reassigned to the reporting units affected on the basis of the fair values of the affected reporting units as of the date of the reassessment in accordance with ASC 350-20-35-45.

An entity should account for a change in its reporting units prospectively, provided that it did not identify an error in its previous identification of reporting units. In addition, an entity should consider whether the reassessment is due to a decline in economic characteristics, which may trigger the requirement to test the reporting unit for impairment between annual testing dates.

2.6.4.1 Reassessment of Reporting Units for Significant Acquisitions and Dispositions

Acquisitions or dispositions of businesses may affect an entity’s reporting units. A new acquisition of a business could result in the identification of a new reporting unit that encompasses the acquired business. However, in other acquisitions, the acquired business could be assigned to multiple reporting units or could result in a change in existing reporting units. Dispositions, on the other hand, could result in the disposal of (1) one or more reporting units in their entirety or (2) portions of one or more reporting units. Entities should reassess their reporting unit structure whenever a significant acquisition or disposition occurs. Reporting units should be identified as of the acquisition date and in a manner consistent with the discussion above. For additional considerations related to the allocation of goodwill associated with a newly acquired business, see Section 2.8.1.

2.6.5 Identification of Reporting Units — Examples

The examples below illustrate the reporting unit structure when the process for identifying reporting units is applied to a hypothetical and limited set of facts. Reporting unit structures will vary among entities on the basis of their facts and circumstances.

Example 2-8

Assume that a parent company has three operating segments and two reportable segments determined in accordance with the provisions of ASC 280.

The reporting units would be determined as follows:

Step 1 — Identify the operating segments in accordance with ASC 280.

Operating Segments 1, 2, and 3 are identified.
Step 2 — Identify the components of each operating segment. Determine whether each component meets the definition of a reporting unit in steps 2(a)–2(c).
- Step 2(a) — Determine whether the component constitutes a business.
- Step 2(b) — Determine whether “discrete financial information” is available for the component.
- Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
Assume that it is determined that Operating Segments 1 and 2 have no components that meet the conditions in steps 2(a)–2(c), while it is determined that Operating Segment 3 has three components (X, Y, and Z) that meet the conditions in steps 2(a)–2(c).
Step 3 — Aggregate components that have similar economic characteristics.

Assume that Components X, Y, and Z have been determined to have similar economic characteristics.

In this example, Operating Segments 1, 2, and 3 are reporting units.

Example 2-9

Assume the same facts as those in the example above, except that it has been determined that Components X, Y, and Z do not possess similar economic characteristics.

In this example, Operating Segment 1, Operating Segment 2, Component X, Component Y, and Component Z are reporting units.

Example 2-10

Assume the same facts as those in Example 2-8, except that the economic characteristics of Component Y and Component Z are determined to be similar to each other but not to those of Component X.

In this example, Operating Segment 1, Operating Segment 2, Component X, and the combination of Component Y and Component Z are reporting units.

Example 2-11

Assume that a parent company has three operating segments and two reportable segments determined in accordance with the provisions of ASC 280.

The reporting units would be determined as follows:

Step 1 — Identify the operating segments in accordance with ASC 280.

Operating Segments 1, 2, and 3 are identified.
Step 2 — Identify the components of the operating segment. Determine whether each component meets the definition of a reporting unit in steps 2(a)–2(c).
- Step 2(a) — Determine whether the component constitutes a business.
- Step 2(b) — Determine whether “discrete financial information” is available for the component.
- Step 2(c) — Determine whether segment management regularly reviews the operating results of the component.
Assume that Operating Segment 1 has two components (Component W and Component X) that meet the conditions in steps 2(a)–2(c); Operating Segment 2 has two components (Component Y and Component Z) that meet the conditions in steps 2(a)–2(c); and Operating Segment 3 has no components that meet the conditions in steps 2(a)–2(c).
Step 3 — Aggregate components that have similar economic characteristics.

Assume that the economic characteristics of Component W of Operating Segment 1 are similar to those of Component Y of Operating Segment 2, but not to those of Component X of Operating Segment 1. Further assume that the economic characteristics of Component Z of Operating Segment 2 are similar to those of Component X of Operating Segment 1 but not to those of Component Y of Operating Segment 2. Because the components with similar economic characteristics (i.e., W/Y and X/Z) are not in the same operating segment, the components are not aggregated or deemed to represent a single reporting unit.

Because the economic characteristics of the components within each operating segment are not similar, Component W, Component X, Component Y, Component Z, and Operating Segment 3 are reporting units.

2.6.6 Equity Method Investments as Reporting Units

An entity’s operating segments are not limited to its consolidated operations. Equity method investments, including investments in joint ventures, may represent operating segments if they otherwise meet the criteria in ASC 280-10-50-1. ASC 280 does not require that an operating segment be a business under ASC 805-10 or that the CODM be responsible for making decisions about resources to be allocated within the segment. Rather, as observed in ASC 280-10-55-2, the CODM may be regularly reviewing the operating results and performance of an equity method investee “for purposes of evaluating whether to retain the investor-investee relationship.” Accordingly, “control over the investee is not a criterion for the investee to be considered an operating segment.” See Section 2.8 of Deloitte’s Roadmap Segment Reporting for more information.

An equity method investment itself could qualify as an operating segment. However, if an equity method investment is only determined to be a component of an operating segment, it would not qualify as a separate reporting unit because it will not meet the definition of a business in ASC 805-10. Therefore, like other assets, it would be eligible to be assigned to a reporting unit if the criteria in ASC 350-20-35-39 are met. See Section 2.7.1.3 for more information about assigning equity method investments to reporting units.

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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.