Proposed Accounting Standards Update for
Intangibles - Goodwill and Other (Topic 350)
After recent debate on how the carrying amount of a reporting unit is calculated when performing Step 1 of the goodwill impairment test, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft for a proposed accounting standards update.
In Step 1 of an impairment analysis, FASB requires an entity to assess whether the carrying amount of a reporting unit exceeds its fair value. Step 2 is an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment. The proposed accounting standards update addresses the question of how to calculate the carrying amount of a reporting unit in Step 1.
Currently, the carrying amount of a reporting unit can be calculated two different ways: on an equity premise or an enterprise premise. The equity premise considers all assets less all liabilities while the enterprise premise considers all assets less liabilities other than those that are part of the capital structure. If the equity premise is used and the resulting carrying amount is zero or negative, Step 1 is automatically satisfied if the fair value of the reporting unit is greater than zero, which it usually is. Because of this possible situation, some practitioners are concerned that Step 2 of the analysis is not performed although there may be other indications of goodwill impairment.
The proposed accounting standards update would clarify that the equity premise is the only method to use to determine carrying value and would modify Step 1 of the goodwill impairment test for reporting units with negative or zero carrying value so that it would be mandatory to complete Step 2 of the analysis if "there are adverse qualitative factors that indicate that it is more likely than not that a goodwill impairment exists".
FASB is requesting comments on the proposed accounting standards update by November 5, 2010. For more information on the proposal, visit the
FASB website.
