At its July 29, 2010 Emerging Issues Task Force (the “Task Force”) meeting, the Task Force discussed a variety of issues, including the calculation of a reporting unit’s carrying value as part of Step 1 of the goodwill impairment test (EITF Issue No. 10-A). The Task Force deferred a decision on this issue, with further discussion expected at future meetings.
Background
- Under ASC Topic 350 (formerly known as SFAS 142), goodwill is tested for impairment at the reporting unit level based on a two step test:
- Step 1: An entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If a reporting unit’s carrying amount exceeds its fair value, the entity must proceed to Step 2.
- Step 2: The amount of goodwill impairment is measured (if any).
- EITF 10-A addresses how an entity should calculate a reporting unit’s carrying amount in Step 1 and whether the entity should consider additional factors in Step 1 that would result in the need to perform Step 2.
- There are various methods in practice related to how a reporting unit’s carrying amount is calculated in Step 1, with entities generally using either:
- An equity-value-based test, which compares the fair value of a reporting unit’s equity to its net book value, or
- An enterprise-value based test, which compares the fair value of a reporting unit excluding the deduction of its interest-bearing debt to its net carrying amount of total assets less non-interest bearing liabilities
- The selection of the Step 1 testing approach can impact whether a reporting unit passes or fails Step 1. Specifically, a question has arisen about how to perform Step 1 when the net assets of a reporting unit are negative. In addition, whether debt is included or excluded from a reporting unit’s carrying amount can lead to different results in Step 1, and therefore affects whether Step 2 is performed.
Meeting Discussions
- The Task Force discussed several options related to calculating the carrying value in Step 1:
- Equity-value based, but proceed to Step 2 if a reporting unit has a negative carrying amount
1A. Equity-valued based, but without the requirement that interest-bearing debt be allocated to single reporting unit enterprises in all cases
1B. Equity-value based, but with the requirement to proceed to Step 2 if a reporting unit has a negative carrying amount AND qualitative factors exist that indicate that goodwill is more likely than not impaired
- Equity-value based, but proceed to Step 2 if qualitative factors exist that indicate goodwill is more likely than not impaired
- Enterprise-value based
- Asset-based approach, in which all liabilities except deferred tax liabilities are not deducted from the carrying amount
- Market participant approach, which is based on how market participants would value a reporting unit
- Equity-value based, but proceed to Step 2 if a reporting unit has a negative carrying amount
- The Task Force did not reach a consensus related to the options above, but directed the FASB staff to perform further research on the four equity-based options (1, 1A, 1B, and 2).
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