Question

. What was the motivation for FASB's revision of the goodwlll impairment test? A. Congressional mandate B. FASB's simplification initiative C. Concern over the cost and complexity of the current standard D. Both B and C

Answer 1

Under current GAAP for public companies, goodwill is not amortized, but is tested at least annually for impairment. The test includes two steps with the option for the entity to first assess qualitative factors (such as a deterioration in general economic conditions or an increased competitive environment) to determine whether it is more likely than not that the fair value of a reporting unit is less than its book value, including goodwill (sometimes referred to as Step 0). If the company determines that it is more likely than not that the fair value of a reporting unit is less than its book value, then it will proceed with the quantitative test.Since the 2001 issuance of Statement of Financial Accounting Standards No. 142 – Goodwill and Other Intangibles, FASB has received input from preparers indicating concerns over the cost and complexity of the annual two-step impairment test. Prior to ASU 2017- 04, FASB issued two updates to the original statement to address cost and complexity.FASB’s update in 2011 provides the optional qualitative assessment (FASB, 2011). If the company finds, based on qualitative factors, that it is more likely than not that the fair value of a reporting unit is not less than its book value, it does not have to proceed with the costly quantitative test. However, a 2013 goodwill impairment study (Tysiac, 2013) found that just 29 percent of public companies and 22 percent of private companies participating used the qualitative assessment, citing the cost of the qualitative assessment and the greater confidence in their conclusions with the quantitative test.