Anyone who has been in the accounting profession for a handful of years has seen numerous changes to the accounting guidance as it relates to goodwill. In 2001, Summary of Statement No. 142 was issued to address accounting for intangible assets acquired in a business combination. This ultimately resulted in the Financial Accounting Standards Board (FASB) disallowing amortization of goodwill. Rather, goodwill was to be assessed for impairment via a two-step process. In 2011, the FASB added a step to the goodwill assessment that allowed companies to perform a qualitative assessment before proceeding to a quantitative analysis (i.e., Step 2). Fast forward to 2014, private companies were offered an alternative for accounting for goodwill that permitted for private companies to amortize goodwill on a straight-line basis. Goodwill would still need to be tested for impairment when a triggering event occurs.
Most recently, the FASB issued Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Impairment of goodwill exists when the carrying amount of the reporting unit exceeds the fair value. The aforementioned Step 2 of the impairment test required an incredibly involved analysis by companies in determining the fair value measurement of all the assets and liabilities of the reporting unit to arrive at a more appropriate measure of goodwill. This analysis was criticized for being costly and complex. As a result of this ASU, impairment considerations are modified from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to when the carrying amount of the reporting unit exceeds its fair value.
This does not eliminate a company’s annual goodwill impairment test, as a qualitative assessment is still an option in determining whether a more detailed impairment test could be necessary. Additionally, companies should consider the income tax effect from any tax-deductible goodwill when measuring impairment losses. This new ASU takes effect for public companies in 2020 (private and other entities in 2021) with early adoption permitted in 2017 for annual goodwill impairment testing.