Current GAAP requires that goodwill be tested for impairment at least annually using a two-step process as follows:
Step 1: an entity compares the fair value of its reporting units with their carrying value, including goodwill. If the fair value of a reporting unit (including goodwill) exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and step 2 is not applicable. If, however,the fair value of the reporting unit (including goodwill) is less than its carrying amount,an entity must proceed to step 2 to determine the amount of the impairment loss.
Step 2:If the carrying amount of a reporting unit is greater than its fair value, a reporting entity must calculate the implied fair value of goodwill by performing a hypothetical application of the acquisition method as of the date of the impairment test. In other words an entity assigns the fair value of a reporting unit determined in first step step 1, to all the assets and liabilities of that reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The goodwill impairment, if any, is equal to the excess of the carrying amount of goodwill over its implied fair value.
Due to concerns about the cost and complexity of the annual goodwill impairment test, the FASB on November 25, 2013, the FASB added a project to its agenda on the accounting for goodwill for public business entities and not-for-profit entities.
Subsequently on October 28, 2015, the FASB decided to proceed with the project under a phased approach. The first phase is to simplify the impairment test. In the second phase of the project, the FASB plans to work concurrently with the IASB to address any additional concerns.
The Board decided to simplify the impairment test by removing the requirement to perform a hypothetical purchase price allocation when the carrying value of a reporting unit exceeds its fair value (step 2 of the impairment model in current GAAP). The Board considered but decided not to allow entities an option to perform step 2.
The Board decided that entities should apply the same impairment model for a reporting unit with a zero or negative carrying amount as the model for a reporting unit with a positive carrying amount by comparing the fair value of the reporting unit to its carrying amount. This reverses the Board’s previous decision to require the write-off of goodwill allocated to reporting units with zero or negative carrying amounts.
The Board decided not to make any changes to the presentation requirements in current GAAP.
The Board decided that in addition to the current disclosure requirements, entities with reporting units with zero or negative carrying amounts should disclose the following:
- Identification of reporting units with zero or negative carrying amounts
- The amount of goodwill attributable to each reporting unit with a zero or negative carrying amount.
The Board decided that entities would be required to adopt the simplified impairment test prospectively.
The Board decided that entities should provide the applicable disclosures described in paragraphs 250-10-50-1(a), which requires disclosure of the nature of and reason for the change in accounting principle, and 250-10-50-2, which states that the required transition disclosures should be included in both interim and annual financial statements in the period of the change.
Source: FASB website