One of the most daunting issues related to purchase price allocations related to business acquisitions has been the requirement that acquired goodwill and other intangibles be evaluated annually for impairment of value. For purposes of complying with generally accepted accounting procedures (GAAP), this requirement has been accomplished via a two-step process that, ultimately, was a complex and costly undertaking.
The Financial Accounting Standards Board (FASB) has decided to reduce the complexity and cost by eliminating Step 2 of the goodwill impairment test. At its recent October 28, 2015 Board meeting, the revision was approved by a 6-to-1 vote and was part of a broader initiative driven to simplify the subsequent (post-acquisition) measurement of goodwill for public business entities and not-for-profit entities under the FASB’s Accounting for Goodwill Impairment Project. The impairment testing criteria had been simplified in December 2013 for privately-held enterprises.
The Board considered three alternative courses of action for the Project including:
- Making no changes to existing GAAP,
- Focusing on subsequent accounting for goodwill by considering alternative methods to amortize and test for impairment, and
- Pursuing a two-phase project: impairment simplification in the first phase, and addressing subsequent accounting for goodwill through convergence with International Accounting Standards Board (IASB) in in the second phase.
After considering the alternatives, the board voted to proceed with the phased approach in alternative 3. The simultaneous decision to eliminate Step 2 effectively completes the first phase of the project. The decision also further aligns U.S. GAAP with International Financial Reporting Standards which currently has a one-step test.
Eliminating Step 2 of the goodwill impairment test will allow issuers to avoid the costly and complex hypothetical purchase price allocation under current GAAP. However, the FASB’s deliberations highlighted several areas where their decision may have negative impacts. When goodwill impairment is indicated in one year, the write-down of goodwill will result a book value that equals fair value. Impairment testing in subsequent years may be highly sensitive to changes in estimates and result in additional impairment. Another possible outcome is that a one-step test might indicate goodwill impairment when long-lived assets are impaired. Because the recoverability test for long-lived assets is not discounted and the impairment test for goodwill is discounted, results may be contradictory. Finally, the elimination of Step 2 does not resolve differences between GAAP for Public Business Entities and private companies.
Visit the FASB website for further information about the goodwill project.
Questions and comments about the elimination of Step 2 in impairment testing can be addressed by Bob Grossman and Melissa Bizyak at 412.338.9300.
