July 29, 2010 – EITF Meeting – Carrying Value Calculation Related to Goodwill Impairment Test

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:
    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

    2. Equity-value based, but proceed to Step 2 if qualitative factors exist that indicate goodwill is more likely than not impaired
    3. Enterprise-value based
    4. Asset-based approach, in which all liabilities except deferred tax liabilities are not deducted from the carrying amount
    5. Market participant approach, which is based on how market participants would value a reporting unit
  • 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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