By Dianora Aria De Marco
In response to concerns about the two-step model being burdensome and costly, the FASB issued new guidance simplifying the accounting for goodwill impairment and eliminated the second step.
Issued on January 26, 2017, Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, requires entities to measure a goodwill impairment loss as the excess of a reporting unit’s carrying amount over its fair value. The eliminated Step 2 had required entities to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill.
FEI’s comment letter, submitted to the FASB on behalf of the Committee on Corporate Reporting, was supportive of the effort to simplify the subsequent accounting for goodwill by eliminating Step 2, and agreed eliminating this step would reduce cost and complexity for some entities.
However, FEI highlighted that there may be situations in which performing Step 2 of the impairment model would be beneficial, depending on an entity’s specific facts and circumstances. If an entity wanted to determine a more accurate measure of impairment, Step 2 would give the entity a more accurate measure than Step 1 alone.
Additionally, there may be situations where Step 2 would reveal goodwill is not actually impaired, when Step 1 alone would have led the entity to report that goodwill was impaired. For those reasons, FEI recommended the Board keep the two-step impairment model, but introduce a practical expedient under which a company could forego Step 2 and measure the goodwill impairment based on the results in Step 1.
Despite the concerns expressed by the preparer community in FEI’s comment letter, the Board ultimately decided to eliminate Step 2 of the impairment model. The Board noted retaining Step 2 on an optional basis could create confusion and may decrease comparability. The Board added it may be more difficult for users to interpret what that impairment represents if entities are calculating goodwill impairment in different ways.
The new guidance retains the optional qualitative assessment of goodwill impairment in which an entity may assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount...