5.4 Additional Disclosure Requirements for SEC Registrants
In addition to the presentation and disclosure requirements described
above, the SEC Division of Corporation Finance has issued guidance under which public
entities would need to provide additional disclosures in MD&A related to potential
material impairment changes.
FRM Section 9510, “Goodwill Impairment”
9510.1 Registrants should provide
disclosure about critical accounting estimates pursuant to the
guidance in Release 33-8350. Disclosure is appropriate when:
- The nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
- The impact of the estimates and assumptions on financial condition or operating performance is material.
9510.2 Estimates related to goodwill
impairment testing are commonly considered critical by
registrants. As a result, the staff has developed guidance
regarding these disclosures with the objective of ensuring that
investors are provided with information that allows for an
assessment of the probability of a future material impairment
charge. Registrants should consider providing the disclosures
outlined in Section 9510.3 in order to comply with the
requirements of S-K 303(a)(3)(ii), which requires a description
of a known uncertainty. Additional guidance appears in Section V
of Release 33-8350, which states that under the existing
MD&A disclosure requirements, a company should address
material implications of uncertainties associated with the
methods, assumptions and estimates underlying the company’s
critical accounting measurements.
9510.3 Registrants should consider
providing the following disclosures for each reporting unit that
is at risk of failing step one of the impairment test (defined
in ASC 350):
- The percentage by which fair value exceeded carrying value as of the date of the most recent test;
- The amount of goodwill allocated to the reporting unit;
- A description of the methods and key assumptions used and how the key assumptions were determined;
- A discussion of the degree of uncertainty associated with the key assumptions. The discussion regarding uncertainty should provide specifics to the extent possible (e.g., the valuation model assumes recovery from a business downturn within a defined period of time); and
- A description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
NOTE: A reporting unit may be at risk of
failing step one of the impairment test if it had a fair value
that is not substantially in excess of carrying value as of the
date of the last impairment test. Whether or not the fair value
was “substantially” in excess of carrying value is a judgment
based on the facts and circumstances including, but not limited
to, the level of uncertainty associated with the methods and
assumptions used for impairment testing.
9510.4 A registrant need not provide
these disclosures if the registrant asserts and discloses that
material goodwill does not exist at reporting units that are at
risk of failing step one or that no reporting units are at risk.
Registrants should consider disclosing the supporting rationale
if material goodwill is allocated to a reporting unit that is at
risk, but disclosure is deemed unnecessary.
Section
9510 of the SEC Division of Corporation Finance Financial Reporting
Manual (FRM) addresses specific disclosures registrants are required to provide in
MD&A about critical accounting estimates related to goodwill impairment. While
registrants often provide the appropriate disclosures before incurring an impairment
charge, the SEC staff has noted instances in which registrants did not disclose the
specific events and circumstances that led to the charge in the period of impairment.
Further, registrants should avoid attributing an impairment charge to general factors
such as "soft market conditions" or expected reductions in sales price or sales volume.
Instead, the disclosures should discuss (1) why the changes occurred, (2) why the change
in forecasts or results occurred in the particular period of the impairment charge, and
(3) what known developments or other doubts could affect the reporting unit's fair value
estimate.
See Section 2.11.1 of Deloitte’s SEC Comment Letter Considerations, Including Industry
Insights for further discussion of goodwill impairment issues
that the SEC staff has addressed in comment letters to registrants. Such issues include
annual goodwill impairment testing, identification of reporting units, and interim
impairment assessments.
5.4.1 Form 8-K Reporting Obligations Related to Material Impairment
A registrant must report a material impairment on Form 8-K, Item 2.06, if it
concludes that a material impairment charge related to one or more of its assets
is required under U.S. GAAP. Item 2.06 states that the following information
must be disclosed in the Form 8-K:
(a) the date of the conclusion that a material charge is required
and a description of the impaired asset or assets and the facts and
circumstances leading to the conclusion that the charge for
impairment is required;
(b) the registrant’s estimate of the amount or range of amounts of
the impairment charge; and
(c) the registrant’s estimate of the amount or range of amounts of
the impairment charge that will result in future cash expenditures,
provided, however, that if the registrant determines that
at the time of filing it is unable in good faith to make a
determination of an estimate required by paragraphs (b) or (c) of
this Item 2.06, no disclosure of such estimate shall be required;
provided further, however, that in any such event, the
registrant shall file an amended report on Form 8-K under this Item
2.06 within four business days after it makes a determination of
such an estimate or range of estimates.
In accordance with the instructions to Item 2.06, a registrant is not required to
file a Form 8-K under Item 2.06 if (1) the registrant reaches its conclusion in
connection with the preparation, review, or audit of financial statements that
must be included in the next periodic Securities Exchange Act of 1934 (the
“Exchange Act”) report; (2) the periodic report is filed on a timely basis; and
(3) this conclusion is disclosed in the report. Further, as noted in
Question 110.01 of the SEC
Division of Corporation Finance’s Compliance and Disclosure Interpretations
(C&DIs), if an impairment conclusion is reached at a time that coincides
with, but is not in connection with, the preparation, review, or audit of
financial statements that must be included in the next periodic Exchange Act
report, a Form 8-K, Item 2.06, is not required if the aforementioned conditions
in the instructions to Item 2.06 are satisfied in the Exchange Act report.
Accordingly, an entity’s need to apply the provisions of Item 2.06 and to file a
Form 8-K would typically be limited to one-off events or transactions occurring
in the middle of the quarter (e.g., a natural disaster, a court case, an
agreement to dispose of a component).
5.4.2 Early-Warning Disclosures
In addition to the requirements in ASC 275-10-50 to disclose certain
risks and uncertainties (see Section 5.2.7) in the financial statements, SEC Regulation S-K, Item
303(b)(2), requires registrants to discuss in MD&A a known uncertainty —
specifically, to disclose the potential for a material impairment charge — in light
of potential impairment triggers (i.e., whether the registrant should have provided
early-warning disclosures about the possibility of an impairment charge in future
periods to help financial statement users understand these risks and how they could
potentially affect the financial statements). For example, in the real estate
industry, the SEC staff continues to request early-warning disclosures about tenant
difficulties that alert investors to the underlying conditions and risks that a
registrant faces before a material charge or decline in performance is reported.
In addition, the SEC staff may use hindsight, after an impairment or
charge is reported (e.g., a material goodwill impairment charge), to inquire why the
registrant did not include any early-warning disclosures in prior periods leading up
to the reporting of such impairment. Such disclosures alert investors to the
underlying conditions and risks that the company faces before a material charge or
decline in performance is reported.
The SEC staff expects a registrant that has recorded, or is at risk for recording,
impairment charges to disclose the following:
- The adequacy and frequency of the registrant’s goodwill impairment tests, including the date of its most recent test.
- The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
- The methods and assumptions used in goodwill impairment tests, including how assumptions compare with recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of the fair value of the assets to changes in the assumptions.
- The registrant’s conclusions regarding its asset groupings.
- The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.
- The types of events that could result in impairments.
- In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.
- The facts and circumstances that led to the impairments. A registrant should also consider disclosing in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.