FASB Issues ASU 2017-04 to Simplify Goodwill Impairment Test
The FASB recently issued ASU 2017-04 to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Under the current guidance in ASC 350, impairment of goodwill is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The process of measuring the implied fair value of goodwill is currently referred to as step 2 of the goodwill impairment test. To perform step 2, an entity must “assign the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination.”
Key Provisions of ASU 2017-04
The new ASU requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit.
An entity may still perform the optional qualitative, however the ASU eliminates the requirement for any reporting unit with zero or negative carrying amount to perform a qualitative assessment. Therefore, the same one-step impairment assessment will apply to all reporting units.
Effective dates of ASU 2017-04
A public business entity that files with the SEC should adopt the ASU for its annual or any interim goodwill impairment tests beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the ASU for its annual or any interim goodwill impairment tests beginning after December 15, 2020.
For all other entities, the ASU is effective for their annual or any interim goodwill impairment tests beginning after December 15, 2021.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
An entity should apply the amendments in this ASU on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the ASU.