2.9 Reorganization of Reporting Structure
ASC 350-20
35-45
When an entity reorganizes its reporting structure in a
manner that changes the composition of one or more of its
reporting units, the guidance in paragraphs 350-20-35-39
through 35-40 shall be used to reassign assets and
liabilities to the reporting units affected. However,
goodwill shall be reassigned to the reporting units affected
using a relative fair value allocation approach similar to
that used when a portion of a reporting unit is to be
disposed of (see paragraphs 350-20-40-1 through 40-7).
35-46
For example, if existing reporting unit A is to be
integrated with reporting units B, C, and D, goodwill in
reporting unit A would be assigned to units B, C, and D
based on the relative fair values of the three portions of
reporting unit A prior to those portions being integrated
with reporting units B, C, and D.
Under ASC 350-20-35-45, when a change in the composition of one or more of an
entity’s reporting units results from the reorganization of its reporting structure,
the entity must:
-
Apply the guidance in ASC 350-20-35-39 through 35-40 to “reassign assets and liabilities to the reporting units affected” (see Section 2.7).
-
Reassign goodwill by using a relative fair value approach on the basis of the guidance in ASC 350-20-40-1 through 40-7.
Paragraph B122 of FASB Statement 142 provides the Board’s rationale for this
requirement, stating that goodwill must be “reassigned to reorganized reporting
units using a relative fair value allocation method similar to that used to
determine the amount of goodwill to allocate to a business being disposed of.” The
paragraph further notes that the “Board concluded that reorganizing a reporting unit
is similar to selling off a business within that reporting unit; thus, the same
allocation methodology should be used.”
We believe that the method described above applies when the composition of one or
more reporting units is changing (e.g., if reporting units are being divided as part
of the reorganization). We do not believe that this approach should be used when the
entity determines that it meets the criteria for combining reporting units that
previously did not meet these criteria. In that case, we believe that the goodwill
of the existing reporting units is simply combined into the new reporting unit. This
is because the composition of the entity’s other reporting units has not changed,
and we believe that it would be inappropriate to reallocate goodwill to such
reporting units.
A change in reporting units resulting from a change in the entity’s reporting
structure should be accounted for prospectively provided that the entity’s previous
reporting unit determinations were not an error.
We believe that an entity should consider performing a goodwill impairment assessment
of the affected reporting units when it undergoes a change in its reporting units.
Although such an assessment is not required under ASC 350-20, it ensures that the
reorganization is not masking a goodwill impairment.