Under new guidelines released last month, the Financial Accounting Standards Board (FASB) will permit an entity to determine whether it is “more likely than not” (greater than 50% likelihood) that the Fair Value of a reporting unit is less than its carrying amount by considering industry and company specific factors.
Based on its assessment of “qualitative factors,” the entity can determine whether it is necessary to perform the two-step goodwill impairment test under Accounting Standards Codification 350 (“Goodwill and Intangible Assets”).
Corporate financial officers have been vocal in their criticism of the cost and complexity of the two-step goodwill impairment testing process, prompting the FASB to act. However, introducing highly judgmental factors into the goodwill impairment determination, in our opinion, invites abuse and the distortion of earnings and financial condition which the two-step impairment test was designed to prevent. Consider the factors the FASB suggests for management’s evaluation in the recent Accounting Standards Update 2011-08: