3.4 Recognition and Measurement of an Impairment Loss
The flowchart below (reproduced from ASC 350-20-55-26) outlines the steps a private
entity or NFP that has elected the accounting alternative to amortize goodwill
should follow in performing the goodwill impairment test.
ASC 350-20
55-26
. . .
Note 1: An entity has the unconditional option to skip the
qualitative assessment and proceed directly to calculating
the fair value of the entity (or the reporting unit) and
comparing that value with its carrying amount, including
goodwill.
3.4.1 Level at Which Goodwill Is Tested for Impairment
ASC 350-20
35-65 Upon
adoption of this accounting alternative, an entity shall
make an accounting policy election to test goodwill for
impairment at the entity level or the reporting unit
level. An entity that elects to perform its impairment
tests at the reporting unit level shall refer to
paragraphs 350-20-35-33 through 35-38 and paragraphs
350-20-55-1 through 55-9 to determine the reporting
units of an entity.
In accordance with ASC 350-20-35-65, a private company or NFP that elects to
amortize goodwill must also “make an accounting policy election to test goodwill
for impairment at the entity level or the reporting unit level.” Because
selection of the level at which to test goodwill is an accounting policy
election, any change would be subject to the requirements of ASC 250, including
whether the change would be preferable.
If an entity elects to test goodwill at the entity level, it would no longer have
to identify its reporting units or assign assets and liabilities to reporting
units. See Section 2.7.3 for information about assigning
assets and liabilities when the entity is a single reporting unit.
If an entity elects to test goodwill for impairment at the reporting unit level,
it would continue to follow the guidance in ASC 350-20 on identifying its
reporting units and assigning assets, including goodwill, and liabilities to
such reporting units (see Sections 2.6 through
2.8).
3.4.2 When to Test Goodwill for Impairment
ASC 350-20
When to Test Goodwill for Impairment
35-66 Goodwill of an entity
(or a reporting unit) shall be tested for impairment if
an event occurs or circumstances change that indicate
that the fair value of the entity (or the reporting
unit) may be below its carrying amount (a triggering
event). Paragraph 350-20-35-3C(a) through (g) includes
examples of those events or circumstances. Those
examples are not all-inclusive, and an entity shall
consider other relevant events and circumstances that
affect the fair value or carrying amount of the entity
(or of a reporting unit) in determining whether to
perform the goodwill impairment test. For those entities
that have elected the accounting alternative for a
goodwill impairment triggering event evaluation in
paragraph 350-20-35-84, a goodwill triggering event
evaluation shall be performed only as of the end of each
reporting period. If an entity determines that there are
no triggering events, then further testing is
unnecessary.
If a private company or NFP adopts the goodwill amortization alternative, it must
still test goodwill for impairment when events or circumstances indicate that
the fair value of the entity (or a reporting unit) may be below its carrying
amount (i.e., a triggering event). In the absence of a triggering event, no
goodwill impairment testing is required. For this reason, entities that have
elected to amortize goodwill will most likely need to perform goodwill
impairment testing less frequently than entities that apply the general goodwill
accounting model.
ASC 350-20-35-66 refers to the factors in ASC 350-20-35-3C(a) through (g), which
are the same factors an entity following the general goodwill accounting model
considers when performing a qualitative assessment or when testing goodwill
between annual goodwill impairment testing dates. ASC 350-20-35-3C lists the
following events and circumstances as examples (this list is not all-inclusive)
of triggering events:
-
Macroeconomic conditions (e.g., increases in interest rates).
-
Overall financial performance (e.g., decline in sales).
-
Cost factors (e.g., increases in labor costs).
-
Industry and market considerations (e.g., deterioration in the environment in which the entity operates).
-
Other relevant entity-specific events (e.g., a change in laws).
-
Events affecting a reporting unit (e.g., expectation of selling all or a portion of the reporting unit).
An entity that has elected to test goodwill at the reporting unit level would
perform the test only for the reporting unit(s) for which a triggering event has
occurred. See Section 2.5.5 for more information about
assessing whether it is more likely than not that goodwill is impaired.
ASC 350-20-35-66 also clarifies that “[f]or those entities that have elected the
accounting alternative for a goodwill impairment triggering event evaluation in
paragraph 350-20-35-84, a goodwill triggering event evaluation shall be
performed only as of the end of each reporting period. If an entity determines
that there are no triggering events, then further testing is unnecessary.”