Chapter 3 — Goodwill Accounting Alternatives for Private Companies and NFPs

3.6 Quantitative Assessment

ASC 350-20

35-73 A goodwill impairment loss, if any, shall be measured as the amount by which the carrying amount of an entity (or a reporting unit) including goodwill exceeds its fair value, limited to the total amount of goodwill of the entity (or allocated to the reporting unit). Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the entity (or the reporting unit), if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss. See Example 2A in paragraph 350-20-55-23A for an illustration.

Under ASC 350-20-35-73, in the quantitative goodwill impairment test, or step 1, a private company or NFP is required to recognize a goodwill impairment loss “as the amount by which the carrying amount of an entity (or a reporting unit) including goodwill exceeds its fair value, limited to the total amount of goodwill of the entity (or allocated to the reporting unit).” Reversal of a goodwill impairment loss is prohibited. Private companies and NFPs perform the quantitative test the same way as all other entities with the exception that they have the option of testing goodwill at the entity level rather than the reporting unit level.

3.6.1 Determining the Fair Value of the Entity or a Reporting Unit

ASC 350-20

35-74 The guidance in paragraphs 350-20-35-22 through 35-27 shall be considered in determining the fair value of the entity (or the reporting unit).

Private companies and NFPs determine the fair value of the entity (or a reporting unit) in accordance with ASC 820 when performing the quantitative impairment test. See Section 2.4.1 for more information about determining the fair value of the entity or reporting unit. Also see Section 5.5.7 for disclosure requirements related to fair value measurements.

3.6.2 Assigning Assets and Liabilities to a Reporting Unit

ASC 350-20

35-75 The guidance in paragraphs 350-20-35-39 through 35-44 shall be considered in assigning acquired assets (including goodwill) and assumed liabilities to the reporting unit when determining the carrying amount of a reporting unit.

If a private company or NFP has elected to test goodwill for impairment at the reporting unit level, it assigns assets and liabilities to reporting units the same way as entities that have not elected the goodwill accounting alternatives. See Section 2.7 for more information about assigning assets and liabilities to reporting units. See Section 2.7.3 for more information about testing goodwill at the entity level.

While not specifically stated, if the entity has elected to test goodwill at the reporting unit level, it must assign goodwill to each reporting unit before performing the goodwill impairment test. See Section 2.8 for guidance on assigning goodwill to reporting units.

Before performing the goodwill impairment test, the entity should ensure that it has adjusted the carrying amount of goodwill to recognize any amortization from the end of the last reporting period to the date on which it determines that it must test goodwill for impairment (i.e., the date of the triggering event). For example, if a calendar-year-end entity that assesses for triggering events throughout the reporting period determines that a triggering event has occurred as of March 31, the entity must ensure that its goodwill balance is adjusted for the three months of amortization in determining the carrying amount of goodwill as of March 31, which is the testing date (see Example 3-2).

3.6.2.1 Deferred Taxes

ASC 350-20

35-76 For an entity subject to the requirements of Topic 740 on income taxes, when determining the carrying amount of an entity (or a reporting unit), deferred income taxes shall be included in the carrying amount of an entity (or the reporting unit), regardless of whether the fair value of the entity (or the reporting unit) will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.

ASC 350-20-35-76 states that “when determining the carrying amount of an entity (or a reporting unit), deferred income taxes shall be included in the carrying amount of an entity (or the reporting unit), regardless of whether the fair value of the entity (or the reporting unit) will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.” This guidance is the same as for entities that are applying the general goodwill accounting model. See Section 2.7.1.4 for more information.

In addition, ASC 350-20-35-73 states that “[a]n entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the entity (or the reporting unit), if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss.” This guidance is also the same as for entities that are applying the general goodwill accounting model. See Section 2.4.8.2 for more information.

3.6.3 Allocating a Goodwill Impairment Loss

ASC 350-20

35-77 The goodwill impairment loss, if any, shall be allocated to individual amortizable units of goodwill of the entity (or the reporting unit) on a pro rata basis using their relative carrying amounts or using another reasonable and rational basis.

35-78 After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis, which shall be amortized over the remaining useful life of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

As discussed in Section 3.3, entities that elect to amortize goodwill must separately track each amortizable unit of goodwill (i.e., the beginning balance of goodwill upon adoption of the alternative and each addition to the goodwill balance), since each amortizable unit of goodwill will have its own unique assigned and remaining amortizable useful life. If a private company or NFP recognizes a goodwill impairment loss, it must allocate the loss to the individual amortizable units of goodwill of the entity (or reporting unit) “on a pro rata basis using their relative carrying amounts or using another reasonable and rational basis.” For example, an entity could conclude that a specific identification method for allocating the impairment loss to an amortizable unit of goodwill is reasonable if it is determined that a particular acquisition’s performance caused the impairment.

The level at which an entity has elected to test goodwill for impairment (i.e., entity level or reporting unit level) will affect how the impairment loss is allocated. That is, if the entity tests at the entity level, an impairment loss (limited to the amount of goodwill recognized by the entity) would be allocated across all the amortizable units of goodwill. If the entity tests at the reporting unit level, an impairment loss (limited to the amount of goodwill assigned to the reporting unit) would only be allocated to the amortizable units of goodwill in the reporting unit in which the loss is recognized. Reversal of a goodwill impairment loss is prohibited.

When an impairment loss is recognized, “the adjusted carrying amount of goodwill shall be its new accounting basis.” While the term “new accounting basis” is not defined, we believe that it suggests that any previously recognized accumulated amortization should be eliminated against the carrying amount of goodwill when an impairment loss is recognized. However, in the absence of specific guidance, there may be diversity in practice related to eliminating the previously recognized accumulated amortization. Any remaining goodwill is amortized over its remaining useful life. The recognition of an impairment loss may be a circumstance that leads the entity to reevaluate the remaining useful life of the goodwill (see Section 3.3.1).

Example 3-2

This example is a continuation of Example 3-1. Company A, a private company that has adopted the goodwill amortization alternative, has elected to (1) test goodwill for impairment at the entity level and (2) amortize each unit of goodwill over the default useful life of 10 years. Company A prepares interim financial statements for debt compliance purposes and has elected to assess for goodwill impairment triggering events at the end of each reporting period. As of March 31, 20X4, A determines that a triggering event has occurred. After performing any other required impairment tests and recognizing any other impairment losses, A quantitatively tests its goodwill for impairment. Company A determines that it must recognize a goodwill impairment loss of $1,050 and allocates the impairment loss pro rata across its amortizable units of goodwill on the basis of the relative carrying amounts of goodwill as follows:

See Section 5.5.6 for information about disclosure requirements related to goodwill impairment losses.

3.6.4 Testing Goodwill and Other Assets at the Same Time

ASC 350-20

35-79 If goodwill and another asset (or asset group) of the entity (or the reporting unit) are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 on property, plant, and equipment (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test. If the asset group is impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.

35-80 The requirement in the preceding paragraph applies to all assets that are tested for impairment, not just those included in the scope of the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.

The goodwill impairment test requires a comparison of the entity’s (or a reporting unit’s) fair value with its carrying amount. Under ASC 350-20-35-79, when a goodwill impairment test and an impairment test for other assets (e.g., inventory, long-lived assets, indefinite-lived intangible assets) coincide, the impairment tests for all other assets should be conducted — and their impact on the carrying amount of the entity or reporting unit should be accounted for — before the goodwill impairment test is completed. This order is the same as for entities that have not adopted the accounting alternatives. See Section 2.5.6.1 for more information.

However, we believe that if goodwill is assigned to a disposal group that is held for sale, the assigned goodwill effectively becomes a separate unit of account that is no longer amortized (regardless of whether the entity has elected to test goodwill at the entity level). As a result, the entity would assess the goodwill assigned to the disposal group for impairment separately in a manner consistent with the guidance in ASC 360-10-35-39. See Section 2.5.6.2 for more information. In addition, see Section 5.5.5 for disclosure requirements related to assigning goodwill to a disposal group.

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