The goodwill impairment test under ASC 350

What is the qualitative assessment?

Step zero: the company considers events and circumstances, such as macroeconomic conditions, industry and market changes, cost increases, overall financial performance, entity-specific events and a sustained decrease in share price, to decide whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further testing is needed that year. A company can skip the qualitative assessment for any reporting unit and go straight to the quantitative test.

How does the goodwill impairment test work?

The company measures the fair value of the reporting unit, usually with an income approach (discounted cash flows), a market approach (multiples of comparable companies or transactions), or both, and compares it with the carrying amount, including goodwill. If carrying amount exceeds fair value, the difference is the impairment loss, but not more than the goodwill allocated to that reporting unit.

A worked goodwill impairment example

A reporting unit has a carrying amount of $1,700 million, including goodwill of $150 million. Its fair value, from a weighting of discounted cash flows and market multiples, is $1,600 million. The impairment loss is $100 million, within the $150 million of goodwill, leaving goodwill of $50 million.

Had the fair value been $1,450 million, the excess of $250 million would be capped at the $150 million of goodwill; the other assets of the reporting unit would not be written down by this test, though they may be impaired under their own guidance. The US GAAP tests sheet of the Impairment test model (Excel) runs this calculation.

Should a company start with the qualitative assessment?

It saves the cost of a valuation when there is plenty of headroom, for example when the last quantitative test showed fair value well above carrying amount and nothing much has changed since. When headroom was thin, or the business or market has weakened, most companies go straight to the quantitative test, because the qualitative assessment would probably fail anyway and auditors would expect strong evidence to support it.

What triggers a test between annual dates?

Events that make it more likely than not that a reporting unit's fair value has fallen below its carrying amount: a significant adverse change in the business climate or legal factors, an adverse action by a regulator, unexpected competition, the loss of key personnel, an expected sale of a significant part of the reporting unit, or a sustained decline in the company's share price below book value.

What about tax-deductible goodwill?

If goodwill is deductible for tax, recognizing an impairment reduces the related deferred tax liability, which itself increases the carrying amount of the reporting unit, so a simultaneous equation is used to find the loss that brings carrying amount down to fair value.

How does this compare with IFRS?

Under IAS 36, the same unit with a value in use of $1,553 million would be impaired by $147 million, and IFRS measures recoverable amount as the higher of value in use and fair value less costs of disposal. See goodwill impairment under IAS 36 and IAS 36 vs US GAAP impairment.

What must be disclosed?

Changes in the carrying amount of goodwill by reportable segment, impairment losses and the facts and circumstances leading to them, and the method used to determine fair value. Public companies discuss reporting units at risk of failing the test in their critical accounting estimates. See ASC 350 explained.

This guide is general information. It is not tax or legal advice for your situation.