FASB Goodwill Impairment Standard Issued
Last week, the Financial Accounting Standards Board (“FASB”) published Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. A result of the Simplification Initiative, the standard simplifies how a company tests goodwill for impairment by eliminating “Step 2”, which measures impairment loss by comparing the carrying amount of goodwill to its implied fair value.
In its news release, the FASB said the ASU will allow companies to measure goodwill impairment as the excess of the reporting unit’s carrying value over its fair value. Stakeholders had complained that the current impairment test creates unnecessary costs and complications without improving the quality of information provided in their financial statements. This ASU now allows companies to measure the goodwill impairment as the excess of the reporting unit’s carrying value over its fair value.
Public companies and other entities that have not adopted the alternative set forth by ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350), will be required to adopt this new standard. Private companies that have adopted ASU No. 2014-02 are permitted but not required to adopt ASU No. 2017-04, but are exempt from the preferability assessment provided they have not also adopted ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, regarding inclusion of identifiable intangible assets in goodwill. If the company has adopted both ASU Nos. 2014-02 and 2014-18, they are not permitted to adopt ASU No. 2017-04 unless they follow the guidance in Topic 250 justifying why this change in accounting policy is preferable.
The option to perform a qualitative assessment for a reporting unit (Step 0) to determine if a quantitative impairment test is necessary will still apply.
ASU No. 2017-04 is effective for public companies that file with the Securities and Exchange Commission (“SEC”) for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
For public business entities that do not file with the SEC should adopt the amendments in this Update for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
All other entities, including nonprofits, that are adopting the amendments in this Update should do so for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Entities should apply the amendments in ASU No. 2017-04 on a prospective basis.