Testing goodwill for impairment under GAAP

December 6, 2016

 


Acquired goodwill and other indefinite-lived intangible assets must be reported on your balance sheet at fair value and tested at least annually for impairment. Testing is also required when a “triggering event” — such as the loss of a key customer or unanticipated competition — occurs that could lower the asset’s value. But there are possible exceptions that could simplify your recordkeeping.

Two steps 

Testing goodwill for impairment requires two steps under U.S. Generally Accepted Accounting Principles (GAAP). First, you must estimate the fair value of the company (or reporting unit if multiple product lines or divisions exist). If book value exceeds fair value, goodwill impairment has likely occurred. 

Under the second part of the test, you must allocate fair value to the tangible and identifiable intangible assets. What’s left over is the implied fair value of goodwill. Once the book value of goodwill has been written down to its fair value, GAAP prohibits you from reversing impairment losses, even if the value eventually recovers. So, companies are understandably hesitant to report impairment and prematurely alarm investors about losses that may someday be recoverable.

Exceptions

In 2014, the Financial Accounting Standards Board (FASB) provided private companies with some simplified reporting alternatives. Under one exception, private companies are required to test for impairment only when there’s a triggering event. Private companies also may elect to amortize acquired goodwill over a period not to exceed 10 years, rather than capitalize it on the balance sheet and test for annual impairment. 

In addition, the FASB recently proposed guidance that, if approved, would remove the second step of the goodwill impairment test for all companies. Under the proposal, an impairment charge for goodwill would equal the amount by which the company’s (or reporting unit’s) book value exceeds its fair value. 


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