Early Adoption of Simplified Goodwill Impairment Rules Could Save Companies Time and Money– June 18, 2020 by Beth Reho

With the COVID-19 pandemic being felt around the world, the impact on operations continues to be uncertain. For some businesses, their reputation, along with their goodwill recorded on the company balance sheet, may be impacted as well.

The Financial Accounting Standards Board (FASB) has issued (ASU) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard eliminates the implied value calculation step of the process, thereby reducing costs and complexities of testing for the impairment. In a time where many companies are looking for additional cost savings, those with a possible impairment may want to consider early adoption now.

Current U.S. GAAP Reporting of Goodwill Impairment

Current U.S. GAAP rules — for those entities that don’t or are not permitted to apply the private company alternative — include an optional “Step 0” in the process of accounting for goodwill.

Step 0 – Qualitative Assessment of Goodwill Impairment
Step 0 allows for a qualitative assessment of whether or not it is likely goodwill is impaired. If the company fails Step 0, or bypasses it, the company must proceed with the two-step quantitative assessment.

Steps 1 and 2 – Quantitative Assessment of Goodwill Impairment
To determine if impairment exists, Step 1 requires you to compare the fair value of the reporting unit to its carrying value. If the carrying value exceeds the fair value, then you must proceed to Step 2 of the goodwill impairment test. This is where you will determine the implied fair value of reporting unit and compare it with its carrying amount. If the carrying amount exceeds the implied fair value, you will need to recognize an impairment loss.

Goodwill Impairment Reporting Under ASU 2017-04

Under ASU 2017-04, your company must still record an impairment charge if a reporting unit’s carrying value exceeds its fair value; however, the new guidance eliminates Step 2 of the current goodwill impairment testing.

You still have the option to do a qualitative assessment or bypass it, but if you choose to do so and fail, you must proceed to the quantitative assessment. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit — meaning it can’t go below zero. You also need to take into consideration any tax deductible goodwill on the carrying amount, if applicable, when measuring the goodwill impairment loss.

When is ASU 2017-04 Effective?

ASU 2017-04, is effective for non-public entities for fiscal years beginning after December 15, 2022, with early adoption permitted. Due to the current economic environment, if you find yourself faced with a goodwill impairment assessment, the elimination of the Step 2 calculation could save you time and money. It’s worth a conversation with your accounting team about early adoption; it could put you ahead of the curve.

Contact Beth Reho at breho@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.