Testing Goodwill for Impairment:
Overview and Implications of Recent
Changes to ASC 350-20
Module 1:
Course introduction
Agenda
Course overview
Overview of changes to guidance
Case study
Observations and action plan
Q&A
Wrap up
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Objectives
• Identify and describe changes to the goodwill
impairment guidance.
• Discuss accounting and auditing implications.
• Discuss professional judgment and
professional skepticism issues to consider
related to the updated guidance.
• Anticipate and prepare for key conversations
with the entity related to the changes.
• Examine and practice accounting and audit
implications in case scenario.
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Module 2:
Overview of changes to the
guidance on testing goodwill
for impairment
Background and purpose of the update
• Background for FASB decision
o In December 2010, the FASB added a project to its agenda to develop an alternative to
the current goodwill impairment assessment guidance.
o Project was in response to concerns raised by preparers for nonpublic entities over the
cost and complexity of performing step one of the goodwill impairment process.
• Purpose
o It gives entities the option of performing a qualitative assessment of whether the fair
value of a reporting unit is more-likely-than-not less than the carrying amount.
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Effective date and transition
• Amendments are effective for annual and interim goodwill
impairment tests performed in fiscal years beginning after
December 15, 2011.
• Early adoption is permitted.
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Scope
• Applies to all entities, both public and nonpublic, that have goodwill recorded on
their balance sheet
• Does not amend the annual testing requirements for other indefinite lived
intangible assets
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Main provisions
Change #1–Option of performing a qualitative assessment before calculating fair
value of the reporting unit
Based on qualitative factors, is it more-likely-than-not that the fair value of the
reporting unit is less than the carrying amount?
This Step is OPTIONAL!
Yes
Step 1: Is the fair value of the
reporting unit less than its carrying
amount, including goodwill?
No
No
Yes
Step 2: Determine the implied fair
value of goodwill and compare to the
carrying amount to determine whether
goodwill is impaired
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No further testing
required
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Main provisions
Change #2–List of qualitative assessment factors
• Macroeconomic conditions
• Industry and market considerations
• Increases in raw materials, labor, or other costs that have a
negative effect on earnings
• Overall financial performance
• Entity-specific events
• Events affecting a reporting unit
• If applicable, a sustained decrease (both absolute and
relative to its peers) in share price
The qualitative factors listed above also apply to interim testing.
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Main provisions
Change #2–List of qualitative factors (continued)
• Entities should take the following into account when
considering qualitative factors:
o Significance and adversity of each factor relative to fair value
of reporting unit
o Positive factors and mitigating circumstances that may affect
analysis
o If the entity has a recent fair value calculation for the reporting
unit, whether the fair value of the reporting unit exceeded its
carrying amount by a substantial margin
o Factors in their totality – no factor is meant to be determinative
or trigger an impairment test on its own
o Qualitative factors are not all-inclusive
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Main provisions
Change #3 – Carryforward option removed
• ASC 350-20 currently allows entities to carryforward a detailed calculation of
the fair value of the reporting unit if certain conditions are met.
1. The assets and liabilities that make up the reporting unit have not changed significantly since the
most recent fair value determination. (A recent significant acquisition or a reorganization of an
entity's segment reporting structure is an example of an event that might significantly change the
composition of a reporting unit.)
2. The most recent fair value determination resulted in an amount that exceeded the carrying amount
of the reporting unit by a substantial margin.
3. Based on an analysis of events that have occurred and circumstances that have changed since
the most recent fair value determination, the likelihood that a current fair value determination
would be less than the current carrying amount of the reporting unit is remote.
• Entities currently using this option would now need to perform a qualitative
assessment or move straight to the quantitative Step 1 calculation.
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Areas of no change
• Step 1 and Step 2 of Goodwill Impairments test
• How goodwill is calculated or assigned to
reporting units
• Requirement to test goodwill annually for
impairment
• Requirement to test goodwill for impairment
between annual tests if events or circumstances
warrant
• Current guidance for testing other indefinitelived intangible assets for impairment
• Goodwill impairment analysis under IFRS
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Module 3:
Galaxy Sports case study
Case study: Galaxy Sports
Team
Team
•
Read handout 1, Galaxy Sports case study
•
Discuss the case study discussion question #1 with your table team
•
Prepare your response for debriefing
Table discussions
Discussion question #1 – 20 minutes
Discussion question #1 debrief – 10 minutes
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Case study: Galaxy Sports discussion question #1
Team
Team
1. Do you believe management has appropriately supported its assertion
that it is more-likely-than-not that the fair value of each reporting unit is greater
than the carrying amount? Why or why not?
What additional analysis or supporting documentation, if any, would you request
from management to support their assertions? Consider the qualitative factors
both generally and individually and in their totality, as outlined in the memo.
Table discussions
Discussion question #1 - 20 minutes
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Case study: Galaxy Sports discussion question
#1 debrief
Team
Team
Summarize and present your team’s findings
1. Do you believe management has appropriately supported its assertion
that it is more-likely-than-not that the fair value of each reporting unit is greater
than the carrying amount? Why or why not?
What additional analysis or supporting documentation, if any, would you request
from management to support their assertions? Consider both generally and the
qualitative factors, individually and in their totality, as outlined in the memo.
Discussion question #1 debrief - 10 minutes
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Observations and action plan
Discussion questions #2 - 4
2. What audit documentation might exist in other parts of the audit file that could be
considered when evaluating the appropriateness of management’s qualitative
analysis? What audit practice aids and resources would you consider using when
developing your professional judgments regarding management’s qualitative
analysis?
3. Do you believe conversations between engagement leadership and entity
management will be needed in order to close any “expectation gap” that may
exist between the extent of documentation management thinks is needed to
support their qualitative assertions and what we may need from an audit
perspective?
4. Do you think your clients will utilize the qualitative assessment? If so, what
concerns do you have about the analysis they may prepare?
Observations and action plan
Discussion questions #2 - 4 – 15 minutes
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Module 4:
Course wrap-up
Testing Goodwill for Impairment:
Overview and Implications of Recent Changes to ASC 350-20
Key learning points
• Understand the recent changes to testing for goodwill for impairment ASC
350-20 and its implications.
• Apply new testing for goodwill for impairment ASC 350-20 guidance.
• Have an action plan for implementing new guidance.
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Questions?
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