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.”
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.