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

2.8 Assigning Goodwill to Reporting Units

ASC 350-20

Assigning Goodwill to Reporting Units

35-41 For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date. Goodwill shall be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner. In addition, that methodology shall be consistent with the objectives of the process of assigning goodwill to reporting units described in paragraphs 350-20-35-42 through 35-43.

Pending Content (Transition Guidance: ASC 805-60-65-1)

35-41 For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination or recognized by a joint venture upon formation shall be assigned to one or more reporting units as of the acquisition date or the joint venture formation date. Goodwill shall be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner. In addition, that methodology shall be consistent with the objectives of the process of assigning goodwill to reporting units described in paragraphs 350-20-35-42 through 35-43.

35-42 In concept, the amount of goodwill assigned to a reporting unit would be determined in a manner similar to how the amount of goodwill recognized in a business combination is determined. That is:

An entity would determine the fair value of the acquired business (or portion thereof) to be included in a reporting unit — the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit. Subtopic 805-20 provides guidance on assigning the fair value of the acquiree to the assets acquired and liabilities assumed in a business combination.
Any excess of the fair value of the acquired business (or portion thereof) over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit is the amount of goodwill assigned to that reporting unit.
Subparagraph not used.

35-43 If goodwill is to be assigned to a reporting unit that has not been assigned any of the assets acquired or liabilities assumed in that acquisition, the amount of goodwill to be assigned to that unit might be determined by applying a with-and-without computation. That is, the difference between the fair value of that reporting unit before the acquisition and its fair value after the acquisition represents the amount of goodwill to be assigned to that reporting unit.

35-44 This Subtopic does not require that goodwill and all other related assets and liabilities assigned to reporting units for purposes of testing goodwill for impairment be reflected in the entity’s reported segments. However, even though an asset may not be included in reported segment assets, the asset (or liability) shall be allocated to a reporting unit for purposes of testing for impairment if it meets the criteria in paragraph 350-20-35-39.

As discussed in Section 1.1, goodwill may arise from (1) an acquisition of a business under ASC 805, (2) an acquisition by an NFP under ASC 958-805, (3) the application of fresh-start reporting under ASC 852, or (4) the formation of a joint venture (after the adoption of ASU 2023-05). An acquiree may also recognize goodwill in its separate financial statements by applying pushdown accounting in accordance with ASC 805-50. Under ASC 350-20-35-41, an entity must assign all goodwill recognized in its financial statements to one or more reporting units as of the acquisition date (i.e., the date the goodwill is initially recognized in the reporting entity’s financial statements).

In some cases, the acquirer will determine that the acquired entity and all its assets, liabilities, and operations represent a new reporting unit or the acquired entity in its entirety may be folded into one of the acquirer’s existing reporting units. If no other reporting units are expected to benefit from the synergies associated with the acquisition, all the goodwill arising from the acquisition would be assigned to the reporting unit to which the acquiree’s assets and liabilities are assigned. In that case, the acquirer would not need to undergo a process of assigning goodwill.

However, it is common for acquired assets, liabilities, or goodwill to be assigned to more than one reporting unit that results from the acquisition, more than one of the acquirer’s existing reporting units, or a combination of both. ASC 350-20 does not prescribe a specific method for assigning goodwill to reporting units, but ASC 350-20-35-41 indicates that the method used should be reasonable, supportable, and applied consistently. Two potential methods are addressed in ASC 350-20-35-42 and 35-43.

In the method described in ASC 350-20-35-42, which is sometimes referred to as the “direct” or the “acquisition” method, an entity assigns goodwill to reporting units in a manner similar to how it would determine the amount of goodwill recognized in a business combination.

The example below illustrates the application of this method.

Example 2-13

Company A acquires Company B in a business combination. The consideration transferred is $100. Given that B’s identifiable net assets are $80, $20 of goodwill is recognized when B is acquired.

Company A has two reporting units, RU-1 and RU-2, and A determines that $50 of B’s identifiable net assets will be assigned to RU-1 and $30 of B’s identifiable net assets will be assigned to RU-2. The fair values of the business (or portion thereof) assigned to RU-1 and RU-2 are $60 and $40, respectively.

Goodwill is assigned to RU-1 and RU-2 on the basis of the difference between the fair value of the business (or portion thereof) assigned and the identifiable net assets assigned. Under this approach, goodwill is assigned as follows:

ASC 350-20-35-43 describes another method for determining the goodwill to assign to a reporting unit. This approach, known as the “with-and-without” method, is often used when the reporting unit is expected to benefit from the synergies of the combination but has not been assigned any of the assets acquired or liabilities assumed in that acquisition. Depending on the facts and circumstances, use of the with-and-without method may also be appropriate when some of the assets acquired or liabilities assumed are assigned to a reporting unit if it would provide a more reasonable and supportable assignment of goodwill on the basis of how the entity’s reporting units are expected to benefit from the synergies of the combination.

The example below illustrates the application of the with-and-without method.

Example 2-14

Company A acquires Company B in a business combination. The consideration transferred is $200. Given that B’s identifiable net assets are $160, the amount of goodwill is $40.

Company A has three reporting units, RU-1, RU-2, and RU-3, and A determines that $100 of B’s identifiable net assets will be assigned to RU-1 and $60 of B’s identifiable net assets will be assigned to RU-2. None of B’s identifiable net assets will be assigned to RU-3; however, RU-3 is expected to benefit from the synergies of the combination. The fair values of the business (or portion thereof) assigned to RU-1 and RU-2 are $115 and $75, respectively. The fair value of RU-3 is $200 before the acquisition and $210 after the acquisition.

Goodwill is assigned to RU-1 and RU-2 on the basis of the difference between the fair value of the business (or portion thereof) assigned and the identifiable net assets assigned (i.e., direct method). For RU-3, goodwill is assigned on the basis of a with-and-without computation. Under this approach, goodwill is assigned as follows:

The approaches in ASC 350-20-35-42 and 35-43 are considered reasonable and supportable, but other methods may be appropriate depending on the facts and circumstances. Regardless of the approach used, an entity would not be expected to recognize an immediate impairment of the acquired goodwill.

2.8.1 Assigning Goodwill When the Entire Entity Is Revalued

When the entity is revalued in its entirety (i.e., because of the adoption of fresh-start reporting under ASC 852 or the application of pushdown accounting in the acquiree’s separate financial statements under ASC 805-50), other reasonable methods might be to assign goodwill on the basis of (1) the relative excess of the reporting units’ fair values over the net identifiable assets assigned to the units or (2) the relative fair values of the reporting units, similarly to when a reorganization of reporting units occurs. As discussed in Section 2.8, regardless of the approach used, the entity would not be expected to recognize an immediate impairment of goodwill.

2.8.2 Assigning Recently Acquired Goodwill to Reporting Units During the Measurement Period

An acquirer may not have the information necessary to complete the accounting for a business combination by the end of the reporting period after the acquisition, especially when the business combination closes shortly before the end of the acquirer’s reporting period or when the acquiree’s operations are significant or complex. Thus, ASC 805-10-25-15 provides a measurement period during which an acquirer can obtain the information it needs to identify and measure the consideration transferred, assets acquired, and liabilities assumed, as well as any previously held or noncontrolling interests. Any adjustments to those items may affect the amount of goodwill recognized. The measurement period for a particular asset, liability, or equity instrument ends once the acquirer determines that either (1) the necessary information has been obtained or (2) the information is not available. However, the measurement period for all items is limited to one year from the acquisition date.

ASC 350-20-50-1 states that “[i]f any portion of goodwill has not yet been allocated to a reporting unit at the date the financial statements are issued, that unallocated amount and the reasons for not allocating that amount shall be disclosed.” Thus, under ASC 350-20, there might be situations in which the allocation of goodwill to reporting units might not be complete by the next reporting date. However, just as an acquirer must make its best effort to account for the business combination provisionally by the next reporting date, we believe that the acquirer should also make an effort to assign goodwill to reporting units at least provisionally by the next reporting date. We believe that once the acquirer completes the accounting for the business combination, it should reassess the amount of goodwill assigned to its reporting units and make any updates as necessary.

In addition, an entity’s goodwill must be tested for impairment at least annually and more frequently if impairment indicators exist. If an entity must test a reporting unit for impairment, all goodwill must be assigned to the reporting units before the goodwill impairment test is performed, even if the amount of goodwill was only determined provisionally. See Section 2.5.2 for more information about performing the goodwill impairment test when the amount of goodwill is provisional.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.