Goodwill impairment under ASU 2017-04 and the private company alternatives

• Measure a goodwill impairment loss using the one-step test from ASU 2017-04
• Apply the 350-20-35-8B gross-up for tax-deductible goodwill
• Explain the ASU 2014-02 amortization and entity-level test alternative
• Describe how ASU 2021-03 changes the timing of triggering event evaluations

The test for most entities

Goodwill is not amortized by public business entities or by private companies that have not elected the alternative. It is assigned to reporting units and tested for impairment at least annually, and between annual tests when an event or change in circumstances makes it more likely than not that the fair value of a reporting unit is below its carrying amount.

ASU 2017-04 removed Step 2, the hypothetical purchase price allocation that measured the implied fair value of goodwill. Under 350-20-35-8 the test now has one quantitative step:

1. Compare the fair value of the reporting unit with its carrying amount, including goodwill.
2. If the carrying amount exceeds fair value, recognize an impairment loss equal to the excess.
3. Limit the loss to the total goodwill allocated to the reporting unit.

The same test applies to reporting units with zero or negative carrying amounts. 350-20-50-1A requires disclosure of those reporting units, the goodwill allocated to each and the reportable segment that includes them.

The qualitative option

Before the quantitative test, an entity may assess qualitative factors (350-20-35-3A through 35-3G): macroeconomic conditions, industry and market changes, cost factors, overall financial performance, entity-specific events, events affecting the reporting unit, and a sustained decrease in share price. If it is not more likely than not that fair value is below carrying amount, no quantitative test is required. An entity may skip the qualitative step for any reporting unit in any period.

Tax-deductible goodwill

When goodwill is deductible for tax, recognizing an impairment loss creates or increases a deferred tax asset, which raises the carrying amount again. 350-20-35-8B requires the loss and the deferred tax effect to be computed together, in a manner similar to 805-740-55-9 through 55-13, so that the carrying amount after the loss equals fair value. When book and tax goodwill are equal before the loss, the loss is the excess divided by one minus the tax rate. The total loss still cannot exceed goodwill.

The private company goodwill alternative

ASU 2014-02 lets a private company elect to:

• amortize goodwill on a straight-line basis over ten years, or less than ten years if the entity demonstrates that another useful life is more appropriate
• choose, as a policy, to test goodwill at the entity level or the reporting unit level
• test goodwill only when a triggering event indicates that the fair value of the entity (or reporting unit) may be below its carrying amount, with no annual test

The test under the alternative is a single step: if the carrying amount of the entity (or reporting unit) exceeds its fair value, the loss is the excess, not to exceed the carrying amount of goodwill. The qualitative option is available here too. An impairment loss reduces the remaining amortizable goodwill, which then continues to be amortized over the remaining life.

ASU 2019-06 extended this alternative, and the ASU 2014-18 intangibles alternative, to not-for-profit entities. Public business entities cannot elect either.

ASU 2021-03: triggering events at period end

Without an election, an entity must monitor for triggering events throughout the period and test as of the date an event occurs. ASU 2021-03 lets private companies and not-for-profit entities elect to evaluate triggering events only as of the end of each reporting period, interim or annual. For an entity that reports only annually, if an event occurs mid-year and the business has recovered by year end, no test is required. The alternative is available whether or not the entity amortizes goodwill.

Documentation

Record the reporting units, the valuation approach, key assumptions and the reconciliation of total reporting unit fair values to market capitalization, if the entity is public. The goodwill impairment test workbook and goodwill impairment memo follow this order.

One reporting unit, with and without tax-deductible goodwill