Some Good News for Public Companies: Revisions in Testing for Goodwill Impairment
June 27, 2012
Public companies should be aware of a recently revised standard by the Financial Accounting Standards Board (FASB) that is intended to reduce the cost and complexity of testing goodwill for impairment. This can very possibly save companies a good deal of money.
Goodwill is defined as an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Because it has real value that must be accounted for, goodwill must be tested annually for impairment, and if found impaired, it must be written down.
In the past, companies were held to a strict standard of following a two-step process to test goodwill for impairment and any write-down if necessary. In step one, a company must determine if the fair value of the company is less than its carrying amount (the amount recorded on the books). If it is, the goodwill is considered “impaired” and that leads to step two in which it is determined if there needs to be a write-down and by how much.
Before the recent FASB revised standard was issued, companies had no choice but to spend a great deal of time and /or money to meet the standards of testing their goodwill for impairment. They either had to hire an expensive independent valuation consultant to do an in-depth analysis to determine if there was an impairment loss, or take on the arduous process themselves. Hiring an independent consultant is costly, and conducting an in-depth analysis every year pulls management’s attention away from the important aspects of running a company. Time and money are two things that small and mid-sized companies cannot spare.
Recently relief came to companies in the form of a revised standard from FASB, which said that companies can now do an in-house qualitative assessment to determine if they need to move on to the two-step process to test goodwill for impairment. A qualitative assessment is much less expensive since it can be done in-house and it is much less time consuming. If, through the qualitative assessment, the company determines that it is not “more likely than not” that the fair value of the company is less than its carrying amount, then it does not need to move on to the two-step process and hire an expensive valuation consultant. If the opposite is true, then it will be necessary to conduct the in-depth analysis and engage in the two-step process.
A qualitative assessment of goodwill is not an arduous process. Here’s what a company needs to assess:
- Macroeconomic conditions
- Industry and market considerations
- Cost factors
- Overall financial performance
- Major events such as change in management or key personnel, loss of customers, or litigation
Aside from satisfying the requirement, conducting qualitative assessments is a healthy thing for your company to undertake, and it’s good practice to do it more than once a year especially if there have been some major changes in the company. You may want to conduct a qualitative analysis after events such as loss of key personnel, unanticipated competition, loss of key customers, etc.
If conducting a qualitative analysis is new to your company, you may want to seek assistance from an outside accountant to help with the initial process and learn how to assess the key factors for future assessments.
It’s not often that a change in regulation reduces costs and complexity for Public companies, but when it does happen it’s important to take advantage of it. The change in the rule regarding testing goodwill for impairment has the potential to save your company a significant amount of money and allow your senior management team to spend more time focusing on running the business.
Scott M. Goodwin, CPA is a Member of the Firm at Wolf & Company, P.C. where he provides audit and advisory services. He assists rapidly growing, entrepreneurial-driven technology companies, and consults on complex accountig matters including revenue recognition, equity instruments and business combinations, internal controls, and corporate governance. Scott can be reached at 617-428-5407 or firstname.lastname@example.org.
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