Valuation & Litigation Services Blog


Proposed Changes to Goodwill Impairment Testing

On May 12, 2016, the FASB issued a Proposed Accounting Standards Update to ASC 350 related to goodwill impairment testing. This update would eliminate Step 2 of the current goodwill impairment test, which requires that a hypothetical purchase price allocation be performed in order to measure the goodwill impairment loss. Under the FASB’s proposal, any goodwill impairment would instead be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, which is determined in Step 1 of the current guidance. All other goodwill impairment guidance would remain unchanged.

The FASB’s proposal would apply to all entities, with the exception of private companies that have adopted the Private Company Council (PCC) goodwill accounting alternative (ASU 2014-02) in which goodwill is amortized over a period not to exceed 10 years.

In testing goodwill for impairment under the current guidance, an entity may first assess qualitative factors, which is known as Step 0. If the entity bypasses or fails Step 0, a two-step goodwill impairment test is performed. Step 1 compares the fair value of a reporting unit to its carrying amount to determine if impairment is present. If the reporting unit’s fair value exceeds its carrying value, no impairment is indicated and the testing is complete.  Alternatively, if the reporting unit’s carrying amount exceeds its fair value, then it’s necessary to complete Step 2, which involves first determining the implied fair value of goodwill, and then comparing it to the carrying amount of that goodwill to measure any impairment loss.  This second step requires a full purchase price allocation to be performed as of the testing date to determine the implied fair value of goodwill.

The FASB’s proposal would permit companies to recognize an impairment loss for the amount by which the reporting unit’s carrying amount exceeds its fair value in Step 1 and eliminate the need to perform Step 2. This proposed change is expected to provide significant savings in both time and cost for companies that perform annual goodwill impairment testing.

The proposed guidance would apply prospectively to all existing goodwill. The proposal would not change the timing of goodwill impairment, and entities would still be able to perform a qualitative assessment before moving on to the quantitative goodwill impairment test.

Comments on the proposal are due by July 11, 2016. This proposal is the first phase of a two-phase project. In Phase Two, the FASB will work with the International Accounting Standards Board (IASB) to deliberate the merits of additional changes to the subsequent accounting for goodwill.

What’s the relevance?

This proposal aims to simplify financial reporting and would also diminish differences between US GAAP and IFRS since IFRS also has a single-step process for calculating goodwill impairment. The FASB acted out of concern from private companies and their stakeholders about the cost and complexity of the current goodwill impairment testing requirements. Accordingly, to measure goodwill impairment, the proposed update to ASC 350 would eliminate the need to perform a purchase price allocation to determine the implied fair value of a company’s goodwill as of the impairment date. The amount of impairment recognized under the FASB proposal could be either larger or smaller than it would be under the current guidance depending on the facts and circumstances of the company recognizing the impairment.

Expertise in financial reporting valuations

Whether developing a goodwill impairment analysis, preparing a purchase price allocation, or determining the value of an ownership interest in a non-public entity held by your company, external auditors often require a third-party appraisal to support the corresponding values for such assets reported on a company’s balance sheet. Skoda Minotti professionals are able to efficiently perform these valuations to provide clients and their auditors with supportable values to record on their balance sheets.

Do you have questions about ASC 350 or other valuation issues? Please contact Sean Saari, CPA/ABV/CVA/MBA at 440-449-6800 or email him at

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