Question

Topic Area: Financial accounting standards.

Objective: To develop your knowledge of the new FASB standard on simplifying the test for goodwill impairment.

Requirement: Prepare a 2-3 page paper typed in a professional manner that addresses the following questions.

Read the link: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168778106&acceptedDisclaimer=true

Required after reading the link:

1.What was the purpose of this new standard and what types of organizations would be affected by it? What prompted FASB to address this issue? (Note: Background information can be found starting on page 45)

2.What are the main provisions of this standard?

3.How do the main provisions of this standard differ from current GAAP?

4.Do you agree with the changes in this standard? Why or why not?

Answer 1

1)What was the purpose of this new standard and what types of organizations would be affected by it? What prompted FASB to address this issue?

Answer-

Purpose-

On January 26, 2017, the FASB issued guidance1 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.

Why it is important?-

The new guidance will simplify financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. The new guidance may result in more or less impairment being recognized than today. For example, a reporting entity with significant unrecognized or appreciated assets may recognize a smaller goodwill impairment than today whereas a larger impairment may result if long-lived assets have carrying amounts in excess of fair value. In addition, failing Step 1 may not result in impairment today. However, under the revised guidance, failing Step 1 will always result in a goodwill impairment. The revised guidance will be more similar to IFRS, which also has a single-step goodwill impairment test. However, other differences (e.g., the unit of account) will remain.

2)What are the main provisions of this standard?

Answer- To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This Update also includes amendments to the Overview and Background Sections of the Codification (as discussed in Part II of the amendments) as part of the Board’s initiative to unify and improve the Overview and Background Sections across Topics and Subtopics. These changes should not affect the related guidance in these Subtopics.

3)How do the main provisions of this standard differ from current GAAP?

Answer- The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 3 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment.

4) Do you agree with the changes in this standard? Why or why not?

Answer- We are in alignmnet with the amendments brought by the FASB for Impairament of Goodwill. Firstly this is in line with the globaly accepted accounting standards and favours mostly all businesses. It will also refelct a true picture of the financials based on tha Fair Value.