The FASB issued an Exposure Draft of a proposed ASU intended to simplify how an entity is required to test goodwill for impairment. The proposal would allow companies to perform a qualitative assessment to determine whether further impairment testing is necessary.
The proposal would allow a company to first assess qualitatively whether it is necessary to perform the current two-step goodwill impairment test. Current guidance requires an entity to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of impairment loss, if any.
In the proposed ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU lists a number of factors to consider in conducting the qualitative assessment, including deteriorating macroeconomic, industry, or market conditions; entity-specific considerations such as a change in management or a decline in overall financial performance; and other events such as an expectation that a reporting unit will be sold.
If approved, the amendments in the proposed ASU would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption would be permitted.