Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR) met in Dallas, TX, in September for its quarterly meeting to discuss the latest accounting and financial reporting issues facing the preparer community. Below is the Part 2 of the CCR What We Learned exclusively for FEI members.Members can downloand the full What We Leaned in PDF format here.
Erik Bradbury, FEI Professional Accounting FellowFASB Eliminating Step 2 of Goodwill Impairment
The FASB’s exposure draft on changes to the goodwill impairment model was released in May 2016 as part of a multi-phased project intended to simplify the accounting for goodwill and to reduce costs for preparers.
The update was designed to change the way companies apply the current goodwill impairment guidance by removing Step 2 from the test. The removal of this step means preparers would no longer be required to conduct a hypothetical purchase price allocation to measure any goodwill impairment loss.
The following table compares current reporting requirements with the FASB proposal:
Current RequirementsFASB ProposalAssess qualitative factors to determine whether a Step 1 test is necessary (often referred to as “Step 0”)No changeStep 1 - Identify potential impairmentIdentify and measure impairmentStep 2 - Measure the impairmentEliminatedPerform qualitative assessment to identify potential impairment for reporting units with zero or negative carrying amounts. Measure identified impairments under existing Step 2Entities would apply the same one-step impairment test to all reporting units, including those with zero or negative carrying amounts. Entities would disclose reporting units with zero or negative carrying amounts, and the amount of goodwill allocated to them.
When requesting feedback on the proposed update, the FASB also asked stakeholders whether Step 2 should remain under a policy election, and whether such an election should be made at the entity or reporting unit level. However, after receiving feedback including CCR’s comment letter, the Board decided, in a preliminary vote, to retain the changes to the model as proposed in the exposure draft by eliminating step 2 completely -- without any option to apply step 2, even under a policy election. This marks a key decision as the FASB has clearly favored simplicity over accuracy despite many preparers asking for the option to retain the more accurate step 2 calculation.
While supportive...