Question

Briefly explain why asset impairment testing is a two-step process for tangible assets and identifiable intangible assets with limited lives, but is only a one-step process (with a different test) for identifiable intangible assets with an indefinite life

Answer 1

The first step of the goodwill impairment test under SFAS 142 compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered unimpaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test should be performed to measure any amount of impairment loss.

The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss should be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.

FASB 142 notes that the implied fair value of goodwill should be determined in the same manner as the amount of goodwill recognized in a business combination. An entity should allocate the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination as of the testing date and as if the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. SFAS 142 further notes that the allocation process should be performed only for purposes of testing goodwill for impairment. An entity should not write up or write down a recognized asset or liability, nor should it recognize a previously unrecognized intangible asset because of the Step 2 allocation process