Goodwill Impairment Testing (ASC 350)
Although goodwill is thought of as “invisible” (not tangible), it still must be accounted for! And part of the accounting for goodwill includes testing for impairment. Goodwill impairment testing is governed by ASC 350-20 and involves a significant amount of judgment and estimation.
So, we’re here today to help summarize the various requirements and considerations for testing goodwill for impairment.
If you’re also curious about other areas of impairment, check out our topic page relating to both nonfinancial assets and financial assets!
Goodwill impairment testing: The basics
Goodwill is recognized by an acquirer in a business combination at the acquisition date. It is essentially calculated as the purchase price of the business combination less the fair value of the net assets acquired.
For public companies (and private companies not electing the PCC alternative), goodwill is not amortized. Note that private companies can elect an accounting alternative (PCC alternative) to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the company demonstrates that another useful life is more appropriate. The remainder of this blog will focus on the requirements for public companies (and private companies not electing the PCC alternative).
Goodwill is required to be tested for impairment at the reporting unit level on (at least) an annual basis.
Goodwill is tested for impairment between annual tests only if an event or change in circumstance occurs that would more likely than not decrease the fair value of a reporting unit below its carrying amount (i.e., a triggering event exists). We discuss triggering events and the need for an interim impairment assessment in more detail within our Impairment: Goodwill course.
Let’s turn our attention to the requirements of the annual goodwill test.
The qualitative test
ASC 350-20 provides an option to perform a qualitative assessment. A company would consider certain qualitative factors to assess whether it is more likely than not (i.e., more than 50%) that its reporting unit’s fair value is less than its carrying amount:
- If it is not more likely than not that the fair value of the reporting unit is less than its carrying amount = Stop the test! There is no impairment of goodwill.
- If it is more likely than not that the fair value of the reporting unit is less than its carrying amount = Move on to the quantitative test!
Remember, because the qualitative test is optional, a company can go directly to the quantitative test without performing the qualitative test. Also note that a company may bypass performing the qualitative test in one year and resume performance in a subsequent year (or vice versa). Additionally, a company may elect to perform the test for one reporting unit but not for others (i.e., it is not all or nothing).
The quantitative test
If a company elects to perform the qualitative test and does not “pass” OR decides to skip the qualitative test altogether (because it is optional), then the company must perform the quantitative test.
The quantitative test is used to identify both the existence of impairment and the amount of the impairment loss. It compares the fair value of a reporting unit (determined in accordance with ASC 820, Fair Value Measurement) with its carrying amount, including goodwill. Note that all reporting units, including those with zero or negative carrying amounts, must apply the requirements of the quantitative test:
- If the fair value of the reporting unit is not less than its carrying value = Stop! There is no goodwill impairment.
- If the fair value of the reporting unit is less than its carrying value = Measure and recognize impairment.
If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in the amount equal to that difference, limited to the total amount of goodwill allocated to that reporting unit.
Final thoughts
We hope you found this post helpful! Impairment testing for any asset involves extensive judgment and thorough documentation of all inputs and assumptions used. Check out our U.S. GAAP Impairment course collection for more comprehensive examples and detail about the various requirements!
About GAAP Dynamics
We’re a DIFFERENT type of accounting training firm. We view training as an opportunity to empower professionals to make informed decisions at the right time. Whether it’s U.S. GAAP, IFRS, or audit training, we’ve trained thousands of professionals since 2001, including at some of the world’s largest firms. Our promise: Accurate, relevant, engaging, and fun training. Want to know how GAAP Dynamics can help you? Let’s talk!
Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
