In an effort to reduce the cost and complexity of performing the first step of the two step goodwill impairment test as currently required by Topic 350, Intangibles - Goodwill and Other, the FASB issued Accounting Standards Update ("ASU") 2011-08, Testing Goodwill for Impairment. The update outlines amendments to Topic 350, dubbed Step Zero, which would permit an entity to qualitatively assess whether the fair value of a reporting unit is less than its carrying amount. The FASB's amendments apply to public as well as non-public entities, are subject to early adoption and would be effective for fiscal years beginning after December 15, 2011.

Based on a qualitative assessment, if the entity determines that it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the entity must perform step one of the goodwill impairment test. Or, the entity has the option to forgo the qualitative assessment and simply perform step one. Under the new test, if the entity determines that events and circumstances indicate that its fair value is not less than its carrying value using a more likely than not criteria (>50%), then no further testing is required.

The qualitative factors outlined in ASU 2011-08 are not intended to be all-inclusive and are not intended to represent stand-alone events or circumstances that would require the entity to perform the first step of the impairment test. In addition, an entity should consider positive and mitigating events and circumstances that may affect its conclusion. 

Examples of events and circumstances that would require assessment are:

• General macroeconomic conditions
  • Deterioration in general economic conditions
  • Limitations accessing capital
  • Fluctuations in foreign exchange rates
  • Other developments in equity and credit markets
• Industry and market considerations
  • Deterioration in the operating environment
  • Increased competition
  • A decline in market-dependent multiples
  • A change in the market for the entity's products or services
  • A regulatory or political development
• Cost factors that have a negative effect on earnings
  • Increases in raw materials, labor or other costs
• Decline in overall financial performance
  • Negative or declining cash flows
  • A decline in actual or planned revenues or earnings
• Entity-specific events
  • Changes in management or key personnel
  • Changes in strategy or customers
  • Bankruptcy or litigation
• Events affecting a reporting unit
  • A change in the carrying amount of net assets (write offs)
  • Plans to sell or dispose of a portion or all of a reporting unit
  • Testing for recoverability of a significant asset group within a reporting unit
  • Recognition of goodwill impairment in a component of the reporting unit
• A sustained decrease in share price, both absolutely and relative to peers

The examples of events and circumstances in ASU 2011-08 would replace existing qualitative factors in FASB ASC 350 that entities must currently consider between annual impairment tests and when the carrying amount of a reporting unit is zero or negative.

In a concurrent action, the FASB announced that it would add a new short-term impairment testing project to its agenda for indefinite lived intangible assets. The purpose of the new project is to explore alternative impairment testing approaches for intangible assets subject to amortization.

To download ASU 2011-08, Testing Goodwill for Impairment, go to the FASB web site.

The AICPA's September 2011 issue of FVS Consulting Digest contains the article Fair Value Measurements: Where Are We Now? written by Mark L. Zyla. The article covers the most recent updates to fair value accounting standards, the development of best practice guidance for measuring fair value and the latest practitioner resources. An excerpt of the article is included below.

Fair Value Measurement, codified in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 820, has come a long way since it was first introduced in 2006 as Statement of Financial Accounting Standards No. 157 (SFAS 157). Over the last five years, Fair Value Measurement has been a source of controversy. However, Fair Value Measurement has survived an economic crisis and it has held up to international scrutiny throughout the process of convergence with International Financial Reporting Standards (IFRS). Although many of the original accounting standards for Fair Value Measurement from SFAS 157 have endured, the accounting standards have evolved. At this point, it appears that the FASB has completed its Fair Value Measurement project, and that convergence of U.S. GAAP fair value measurement concepts with international standards has been substantially achieved. The FASB recently issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS simultaneously with the release of IFRS 13, Fair Value Measurement by the International Accounting Standards Board. The current Fair Value Measurement guidance in Topic 820 is likely to remain intact for the foreseeable future as the FASB and IASB shift their focus to other convergence projects.

Fair value measurement can be complex, particularly when measuring assets acquired in a business combination and performing impairment testing. Both the accounting and valuation professions have been working to develop best practice guidance with the goal of creating a consensus among practitioners about appropriate measurement processes and assumptions to use when measuring fair value for financial reporting purposes. The convergence of U.S. GAAP with IFRS means that fair value measurements will continue to gain prominence as a valuation basis for financial reporting.

Practitioners can use the following resources that are currently available to address best valuation practices.

• The FASB's Valuation Resource Group
• The Public Company Accounting Oversight Board's Practice Alerts
• AICPA Practice Aid: Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries
• AICPA Practice Aid: Valuation of Privately-Held Securities Issued as Compensation
• The Appraisal Foundation's Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group - Contributory Assets and Identification of Contributory Assets and Calculation of Economic Rents: Toolkit.

The FVS Consulting Digest, a publication for the AICPA's Forensic and Valuation Services Section members, focuses on issues, cases, practice management tips and valuation news. The Digest is available at AICPA's web site.

You may also request a copy of this article by contacting Mark Zyla at

mzyla@acuitasinc.com.