As a result of numerous requests from privately-held companies, the Financial Accounting Standards Board (FASB) recently issued a proposed update related to goodwill impairment testing. According to the current goodwill impairment testing rules, management must first determine whether the fair value of their company/reporting unit is greater than its book value. The valuation analysis that must be prepared to support the fair value determination (and pass auditor scrutiny) is sometimes too cumbersome for company staff. As an alternative, companies often hire third-party business valuation experts to prepare the valuation analysis for them (to satisfy auditor demands for a supportable valuation analysis), but this is not without an associated cost. As a result, FASB has proposed giving companies the option to first assess certain qualitative factors to determine whether it is a more likely than not (greater than 50% chance) that the fair value of a company/reporting unit is less than its book value.
As of the middle of June, FASB had already received nearly 100 comment letters on this proposed standards update with one of the main concerns being the extent to which management’s qualitative assessment of a company/reporting unit’s fair value can be audited. Such comments from detractors of the proposed rule appear to have gone unheeded as FASB approved the proposed change in accounting treatment in August 2011. The final Accounting Standards Update (ASU) related to this change is expected to be issued in September 2011 and will be effective for goodwill impairment tests for years beginning after December 15, 2011, although early adoption will be permitted.
Have questions about how these proposed changes will affect your company/reporting unit? Post your question below or contact our Financial Reporting Valuations group at 440-449-6800.