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Goodwill Impairment Testing

Purpose: Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350 – Goodwill and Other, requires an annual impairment test of goodwill, at a level of reporting referred to as the reporting unit.

According to ASC 350, entities have the option to assess qualitative factors and to determine whether a goodwill impairment test is necessary prior to performing the first step of the two-step goodwill impairment test. In other words, entities are not required to calculate the fair value of a reporting unit unless it is more likely than not that the reporting unit’s fair value is less than its carrying amount. Alternatively, entities have an unconditional option to bypass the qualitative test and perform the first step of the goodwill impairment test directly.

The first step compares the fair value of the reporting unit with its carrying amount. The fair value of a reporting unit is the amount at which that unit could be bought or sold as a whole in a current transaction between willing parties, that is, other than in a forced or liquidation sale. If the fair value is less than the carrying amount, then the second step is performed, measuring the amount of the impairment loss, if any.

The second step is equivalent to a purchase price allocation. In a purchase price allocation, each asset and liability of the reporting unit must be identified and valued. Guidance for assigning values to assets and liabilities is provided in ASC 805. The amount by which the fair value established in step one exceeds the amount allocated to the assets and liabilities of a reporting unit is the implied fair value of goodwill. The excess of the carrying amount of goodwill over the fair value of that goodwill determines the amount of the goodwill impairment.

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