Financial Reporting Compliance
ASC 350 - Goodwill and Other Intangible Assets
Goodwill Impairment Test
According to GAAP, companies with goodwill on their balance sheet are required to test that goodwill annually for impairment. A goodwill impairment test is broken down into two steps. The first step requires the company to determine if the fair value of a reporting unit exceeds its carrying amount on the balance sheet. If the fair value is greater than the carrying amount, then there is no goodwill impairment and the test is complete. If the fair value is less than the carrying amount, then the company should proceed to step 2 to determine the amount of goodwill impairment. Step 2 is similar to aPurchase Price Allocation analysis. The company’s tangible and intangible assets are re-measured to their fair value. The residual amount after this re-measurement is the new carrying amount of goodwill. The amount of any goodwill impairment is written off on the company’s income statement during the period the goodwill impairment occurred. Once goodwill has been impaired, it cannot be written up in subsequent accounting periods.
According to ASC 350 – Goodwill and Other Intangible Assets, a reporting unit is an operating segment or one level below an operating segment. Management determines, in consultation with their auditors, the number of reporting units for the company.
What to Expect
For a publicly traded company, the market will set the value of total capitalization on the valuation date. For private company a business valuation will be required, which is why it may make sense to combine annual goodwill impairment studies with valuations for stock compensation or other purposes.
For larger companies, the goodwill impairment test is typically performed at the end of the third fiscal quarter, such that the financial impact (if any) of the charge for impairment is known prior to the year-end audit.