Exposure Draft on Testing for Goodwill Impairment—Electronic Constituent Feedback Form

As a private organization serving a broad public interest, the FASB has adopted an open decision-making process that permits considerable interaction between the Board and its constituents. One significant part of interaction is in the form of comment letters and more recently, electronic constituent feedback forms. Comment letters and constituent feedback forms are received from constituents in response to Discussion Papers, Exposure Drafts, and other discussion documents that are released to the public for comment.

Comment letters and constituent feedback responses, which become an important part of a project's public record, are an important source of information regarding constituents' views on and experiences related to issues raised in a discussion document.

The Board invites individuals and organizations to send comments through the FASB’s new electronic constituent feedback form below on all matters in this Exposure Draft. Interested parties that wish to provide their comments by letter should submit their letters by email to director@fasb.org, File Reference No. 2011-180. All responses from those wishing to comment on the Exposure Draft must be received by June 6, 2011.

This Exposure Draft of a Proposed Accounting Standards Update is attached below. While constituents are encouraged to read the entire document, the following information summarizes the background and the proposed changes as included in pages 1 through 5 of the Exposure Draft. Constituents are requested to respond to a short list of questions about the proposal, which can be accessed at the bottom of this page, and also will have the opportunity to provide any other comments about the proposal at the end of the electronic constituent feedback form.

Download the FASB Proposed Accounting Standards Update 

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)?

The Board received input from preparers of nonpublic entity financial statements indicating concerns about the cost and complexity of performing the first step of the two-step goodwill impairment test required under Topic 350, Intangibles–Goodwill and Other. To address these concerns, some financial statement preparers recommended, among other suggestions, that the Board allow an entity to use a qualitative approach for testing goodwill for impairment.

The objective of this proposed Update is to simplify how an entity is required to test goodwill for impairment. The amendments in the proposed Update would permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test currently required under Topic 350. The more-likely-than-not threshold would be defined as having a likelihood of more than 50 percent.

Current guidance under Topic 350 requires an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the proposed amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

Who Would Be Affected by the Amendments in This Proposed Update?

The amendments in this proposed Update would apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements.

What Are the Main Provisions?

Under the amendments in this proposed Update, an entity would have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test would be unnecessary. However, if an entity concludes otherwise, then it would be required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as currently described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity would be required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as currently described in paragraph 350-20-35-9. Under the amendments in this proposed Update, an entity, on the basis of its discretion, would have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity would be able to resume performing the qualitative assessment in any subsequent period.

The amendments in this proposed Update would include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The examples of events and circumstances are not intended to be all-inclusive, and an entity may identify other relevant events or circumstances to consider in determining whether to perform the first step of the two-step impairment test. None of the individual examples of events and circumstances are intended to represent standalone events or circumstances that necessarily would require an entity to perform the first step of the goodwill impairment test.

The examples of events and circumstances in the proposed amendments would include events and circumstances that may indicate that the fair value of a reporting unit is less than its carrying amount. In reaching its conclusions, an entity would need to consider how significant each of the adverse events or circumstances identified could be to the estimated fair value of its reporting unit. Also, an entity should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity has a recent fair value calculation for a reporting unit, it also may include as a factor in its consideration whether the fair value exceeded the carrying amount by a substantial margin in deciding whether the first step of the impairment test is necessary.

Under the amendments in this proposed Update, the examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment test would supersede the examples in paragraph 350-20-35-30 of events and circumstances an entity should consider when testing goodwill for impairment between annual tests. The proposed examples of events and circumstances also would supersede the current examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should evaluate in determining whether to perform the second step of the impairment test, used to measure the amount of the loss, if any.

Under the amendments in this proposed Update, an entity would no longer be permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as currently permitted by paragraph 350-20-35-29.

The proposed amendments would not change the current guidance for testing indefinite-lived intangible assets for impairment.

How Would the Main Provisions Differ from Current U.S. Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement?

The amendments in this proposed Update are intended to reduce complexity and costs by allowing an entity to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The proposed amendments also would improve current guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the proposed amendments would improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount would consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test.

When Would the Amendments Be Effective?

The amendments in this proposed Update would be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption would be permitted.

How Do the Proposed Provisions Compare with International Financial Reporting Standards (IFRS)?

International Accounting Standard 36, Impairment of Assets (IAS 36), requires an entity to test goodwill for impairment using a single-step quantitative test performed at the level of a cash-generating unit or group of cash-generating units. The test must be performed at least annually and between annual tests whenever there is an indication of impairment. IAS 36 requires an entity to compare the carrying amount of a cash-generating unit with its recoverable amount. An entity would record the excess of the carrying amount over the recoverable amount as an impairment loss, and the amount of that impairment loss is not limited to the carrying amount of goodwill recorded in the cash-generating unit.

IFRS for small and medium-sized entities requires goodwill to be amortized over its estimated useful life, or a 10-year period if a reliable estimate of the useful life cannot be made. An entity reporting under IFRS for small and medium-sized entities is required to assess, on the basis of qualitative factors, whether there is any indication that goodwill may be impaired at each reporting date.

The Board recognizes that the amendments in this proposed Update do not improve convergence of Topic 350 and IAS 36 relating to how an entity tests goodwill for impairment. The Board believes that such an effort is beyond the scope of this proposed Update and should be done more broadly, by comprehensively addressing these and other differences in impairment guidance between U.S. GAAP and IFRS.

Constituents should click below to respond to questions and provide input about this Exposure Draft:

Electronic Constituent Feedback Form

Note that respondents using the electronic constituent feedback form will be able to save their draft responses prior to clicking the Submit button located at the end of the form. Once the field requiring the name of the respondent is completed and Question 1 regarding the type of respondent is answered, then respondents will be able to view all of the remaining questions in the form by clicking the Next button located at the bottom of each screen. A Save button is located at the bottom of each subsequent screen and once clicked will present respondents with a link that should be copied and retained for later use. When this link is used it will bring respondents back into their form, whereby they may review previous responses and complete their entries.