Pursuant to accounting rules under Accounting Standards Codification Subtopic 350-20-35-1, goodwill and certain intangibles are not amortized; rather, these assets must be periodically tested for impairment under Accounting Standards Codification No. 350, Intangible–Goodwill and Other (ASC 350 or the Statement).
Under ASC 350, companies must test their goodwill for impairment at three different points in time. The first is the transitional test, which was required at the beginning of the fiscal year in which the Statement was adopted. In general, the valuation methods used for the transitional test must be consistent with all subsequent impairment testing. The second type of impairment testing is the interim test, which is required if certain “trigger events” occur, such as adverse changes in the business climate or market which might negatively impact the value of a reporting unit. Finally, companies must also perform annual tests for impairment. However, upon meeting certain criteria, some firms may not require a quantitative annual test.
The goodwill impairment tests are two-step. The Step One impairment test compares the fair value of a reporting unit to its carrying value. If the fair value exceeds carrying value there is no goodwill impairment and the test is complete. If not, impairment is indicated, requiring a Step Two impairment test. The Step Two test, which is similar to an allocation of purchase price performed pursuant to ASC 805, quantifies the amount of goodwill impairment.
There are other hurdles within ASC 350 that must be addressed to properly apply these standards. First, companies may have to reclassify their operations into so-called “reporting units.” Next, intangible assets need to be properly classified and allocated among a company’s various reporting units. Additionally, impairment tests of other tangible and intangible assets may need to be conducted prior to performing tests under ASC 350.
Public and many private companies need to seek expert advice to help them prepare impairment studies consistent with the Statement. We suggest that companies work closely with their auditors, valuation experts and financial accounting department to properly address the requirements of the Statement before conducting any impairment analyses. CBIZ Valuation Group can assist in the design and implementation of impairment studies that meet the requirements of the Statement. Our work is cost-effective, flexible and, most importantly, provides you with the information you need to answer inquiries from your stakeholders, your audit committee and the Securities and Exchange Commission. Clients choose us for our subject matter expertise, quality of service and independence.
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