Goodwill Impairment Testing (ASC 350)

Accounting for business combinations has historically been a hot button topic in financial reporting. With the increase in number of intangible assets being acquired through business combinations, the need for better financial information has increased. FASB Accounting Standards Codification Topic 350 (“ASC 350”), formerly FASB Statement No. 142, provides guidance on financial accounting and reporting related to goodwill and other intangibles for U.S. GAAP purposes. Typically, goodwill and certain intangibles are not amortized. Rather, these intangible assets must be periodically tested for impairment at the reporting unit level. Under the old rules, if it was “more likely than not” that the fair value of the reporting unit was less than its carrying value, then a two-step impairment test was performed to identify potential goodwill impairment and measure the amount of loss to be recognized, if any. In September 2011, the FASB issued ASU 2011-08 to help alleviate the burden of the two-step impairment test process. Under the new rules, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of these qualitative factors, management determines it is not “more likely than not” that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.


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