Home > Uncategorized > FASB’s new standard for testing goodwill impairment–not better, I don’t think . . .

FASB’s new standard for testing goodwill impairment–not better, I don’t think . . .

On August 10, 2011 the Financial Accounting Standards Board (FASB) approved a revised accounting standard to simplify how an entity tests goodwill for impairment.  I don’t see how the new standard is an improvement in accounting transparency or reliability.  Instead, it appears that the revision is intended primarily to reduce audit costs and processes.

Click Here for the FASB press release.

According to the FASB press release “’The Board’s decision today comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test’ . . . ”  “’The amendments approved by the Board address those concerns and will simplify the process for public and nonpublic entities alike.’”

Under the new process the entity will first assess “qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment.”

Previously an entity was actually required to test goodwill for impairment on at least an annual basis by first comparing the fair value of a reporting unit with its carrying value amount including goodwill.  If the fair value of the reporting unit was less than its carrying value amount, the second step of the test would measure the amount of impairment loss.

The new process, I believe, will result in an evaluation of the value of goodwill that is much more subjective and less economically supportable.  Evaluation of goodwill impairment is important, and can be especially important in times of economic uncertainty and for entities that hold assets or technologies that have limited useful life.

You can expect that the new process will be adopted immediately for almost every entity although formal adoption is required for fiscal years beginning after December 15, 2011.

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