In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350), to provide for a qualitative approach in testing goodwill for impairment. The update was driven by concerns expressed by privately held companies that the existing two-step goodwill impairment test was both costly and complex.
The two-step process for calculating goodwill impairment continues to exist within Topic 350. Step One of the test is to calculate the fair value of the reporting unit and compare the calculated results to the carrying amount of the reporting unit, including goodwill. If the fair value of the reporting unit is less than the carrying amount of the reporting unit, then Step Two of the test is completed to determine the amount of the impairment loss, if any.
The amendments to Topic 350 now provide for a qualitative assessment before completing Step One of the previously existing impairment test. An entity now has the option to first assess qualitative factors to determine whether the existence of events and circumstances results in a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Examples of events and circumstances include the following:
- Macroeconomic conditions
- Industry and market conditions
- Cost factors with a negative effect on earnings and cash flows
- Overall financial performance