Goodwill, that fuzzy unknown intangible asset that is tested for impairment at least annually or more frequently when a triggering event is present. For privately held companies, FASB Accounting Standards Update 2014-02 Intangibles – Goodwill and Other, simplified the goodwill impairment process by removing the annual impairment test and allowing private companies to amortize goodwill, but the standard did not remove the requirement to test goodwill for impairment when a triggering event is present. So, what exactly is a triggering event and how do you test goodwill for impairment?
Under U.S. Generally Accepted Account Principles (GAAP), triggering events are not defined, but indicators are defined. In general, a triggering event is any event that could indicate the value of a reporting unit is no longer recoverable. This includes but is not limited to: macroeconomic conditions, such as a deterioration in general economic conditions; deterioration in the environment in which the company operations; adverse cost factors; negative or declining cash flows; or other company specific events such as changes in management, strategy, litigation, or bankruptcy. If one of these events is present, it is a strong indicator you may need to perform an impairment test.
Before going through the lengthy goodwill impairment test, first consider several qualitative factors. Are the triggering events a "blip" on the radar that are one-time events? If so, it may not be likely that goodwill is impaired. If these events have been recurring and they are likely to continue, this provides strong evidence that it is likely that goodwill could be impaired.
If your assessment of qualitative factors still indicates a potential impairment exists, start by testing your other long-lived assets for impairment. These assets include your fixed assets and intangible assets outside of goodwill. If the fair values of these assets are impaired, record an impairment charge. After this assessment, you still believe a potential impairment of goodwill exists, you would then move to the next stage and test for impairment.
When testing goodwill for impairment, you would first need to determine the fair value of the reporting unit. This fair value is then compared to the carrying value of the assets and liabilities of the reporting unit. If the carrying value is less than fair value, no goodwill impairment exists. If carrying value exceeds the fair value, you impair goodwill to the extent that carrying value exceeds fair value. If this difference exceeds goodwill, goodwill is fully impaired, and you need to consider reevaluating your impairment analysis of the other long-lived assets.
Testing goodwill for impairment can be confusing, but the concept itself is rather straight forward. Where goodwill impairment becomes difficult is recognizing that you have the potential for impairment, and determining an accurate fair value of the reporting unit. This is where a Certified Public Accountant with the Accredited in Business Valuation designation can be beneficial. These specialists are uniquely positioned to assist in determining the fair value of the reporting unit, and have an in-depth understanding of GAAP when it comes to goodwill impairment standards.
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