Recently, the Financial Accounting Standards Board (“FASB”) discussed whether and how to change the subsequent (post-transaction) accounting for goodwill for public companies and not-for-profit entities. Based upon these discussions, the Board decided to move forward under a two-phased approach:
Phase 1 – Simplify goodwill impairment testing by eliminating Step 2 of the goodwill impairment test. The FASB considered, but decided not to let companies have an option to perform Step 2.
Phase 2 – The FASB agreed to work concurrently with the International Accounting Standard Board (“IASB”) regarding any additional concerns about subsequent accounting for goodwill.
While the details of Phase 2 are obviously not clear, if Phase 1 is implemented (it is still not final), this would reduce the complexity of the goodwill impairment test for public companies and not-for-profit entities.
The goodwill impairment test for public companies had always been a two-step process. Step 1 involved comparing the carrying value of a reporting unit’s equity to its fair value. If the carrying value exceeded fair value, Step 2 was required. Step 2 required performing a hypothetical purchase price allocation in order to quantify the amount of goodwill impairment. Under the proposed changes, goodwill impairment would be measured as the difference between the carrying value and fair value of a reporting unit (assuming carrying value exceeds fair value) as determined in Step 1.
This change was based in part on the FASB’s Private Company Council’s (“PCC”) decision to eliminate Step 2 of the goodwill impairment test for private companies.
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