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Good news: Testing for goodwill impairment just got simpler

April 6, 2017 Article 2 min read
Richard L. Lies, III
If your company recently purchased another entity, it likely has goodwill on its financial statements. We expect many companies to early-adopt recently issued accounting guidance to take advantage of reduced complexity, time, and costs in applying the goodwill impairment.

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Goodwill impairment affects organizations following an acquisition since companies that have acquired another entity will most likely have goodwill on their financial statements.

In late January, the Financial Accounting Standards Board (FASB), issued new guidance on applying the goodwill impairment test. The new guidance eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. The change is expected to reduce the time and cost associated with measuring impairment losses.

Who's affected?

Entities, including public companies, that have goodwill reported on their financial statements and haven’t elected the private company alternative for the subsequent measurement of goodwill are required to adopt this guidance. Special transition guidance exists for private companies that have adopted the private company alternative for goodwill.

Key Provisions

First, the FASB eliminated Step 2 from the goodwill impairment test, which is expected to simplify the measurement of goodwill impairment. Previously, calculating the implied fair value of goodwill under Step 2 was a complex process and required a number of steps to calculate the amount of the impairment loss.

Instead, under the new changes, companies will perform future goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. The impairment charge recognized will now be the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the amount of goodwill on the balance sheet. This change in measuring the amount of the impairment loss could result in an impairment that is higher or lower than under the previous standard.

Second, the FASB changed the test for reporting units with a zero or negative carrying amount. The requirement for these entities to start with a qualitative assessment and, if an entity fails that qualitative test, to perform Step 2 of the goodwill impairment test, has been eliminated. Under the new guidance, these entities will perform the same goodwill impairment test as all other entities.

The guidance related to reporting units with zero or negative carrying amounts has changed multiple times over recent years. It's likely that this most recent change will make it easier for companies with a zero or negative carrying value to pass the goodwill impairment test since fair value of equity in a reporting unit is likely to be greater than zero. As a result, when the carrying value of equity is negative, a reporting unit will pass the goodwill impairment test in many circumstances.  This can be counterintuitive since a negative or zero carrying value often is a result of an underperforming entity, which would generally imply that impairment of goodwill is necessary.


The new impairment testing guidance is applied prospectively and is required to be used in 2020 and 2021 for public companies (depending on whether they file with the SEC), and in 2022 for all other entities. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after Jan. 1, 2017.

We expect to see many entities early-adopt the new guidance to take advantage of the reduced complexity, time, and cost to perform the test. Entities for which the impairment loss could be higher under the new method may, however, choose to wait to adopt. 

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