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Level at Which Goodwill is Tested for Impairment Won’t Change, FASB Signals

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB on January 26, 2022, tentatively voted 4 to 3 against changing the unit level at which goodwill should be tested for whether its value has dwindled – a win for the investor voices on the board.

If the board were to change from testing for goodwill impairment at the reporting level to the more aggregated operating segment level, it could cause fewer impairments to be recognized which investors do not favor.

“Investors lose hundreds of billions of dollars of market cap as a result of loan acquisitions either through paying too much or poor execution,” FASB member Fred Cannon said. “And I believe that while we move to an amortization model to reflect the cost of the acquisition, if we move completely to that we still miss out on a true economic event and that is measuring actual impairments especially in the early years of acquisitions,” he said. “So I think it’s critically important to maintain as robust an impairment model as possible, if indeed we continue to move toward amortization.”

Goodwill is an accounting term for the figure that is recorded on the balance sheet after subtracting the book value of a business from the higher price that was paid for it. Goodwill becomes impaired when its fair value declines below its carrying value.

The narrow discussion aimed to give board leanings on whether the impairment testing for the goodwill figure should stay at the reporting unit level, or be changed to the operating segment level in the context of an earlier decision to amortize goodwill.

Needed a Tie-Breaker

FASB Chair Richard Jones gave the surprising tie-breaking vote – on the side of the arguments posed by board analysts Cannon, Gary Buesser, and academic Christine Botosan.

“I don’t think the impairment model does a good job of reflecting the declining value of what we ascribe to goodwill at the date of acquisition, and I think that’s why I’m interested in the amortization model,” Jones said. “That being said, I do think in accounting we have a perception issue” that one level gives a more precise calculation and until that is overcome the board did not make the case for change, he said.

Buesser, Cannon, and Botosan smiled.

“We’re making a number of significant cost reducing changes to the subsequent accounting for goodwill,” Botosan had argued. “So I believe that leaving a few teeth in the impairment test like testing at a lower level is a reasonable compromise between preparers’ cost concerns and users concerns about losing information content from impairments becoming much less frequent,” she said.

Similarly, Buesser said investors would not consider fewer and later impairments to be a good accounting improvement. “I think that’s the opposite direction of where they want us to go,” he said.

A reporting unit is an operating segment or one level below an operating segment, according to meeting papers. An operating segment is a component of a public entity that engages in business activities, has its operating results regularly reviewed by the chief operating decision maker, and for which discrete financial information is available.

Retaining the reporting unit for impairment testing would be in line with the preference expressed by some companies that the impairment testing be performed at the most disaggregated level possible, and it would not add cost, meeting papers state.

Preparers, Practitioners Wanted a Change

FASB Vice Chair James Kroeker, Marsha Hunt, and Susan Cosper, who lost the vote, had agreed with staff recommendations to change the level of impairment testing to the operating segment.

They, as did staff, preferred aligning the impairment test with information about operating results already provided in the financial statements, stating that reporting units are not used in financial reporting outside of the goodwill impairment test.

In addition, they said that the board’s decision to bring back amortization of goodwill is responsive to recognizing the cost of an acquisition over time, and would also address user concerns about too little impairment information being given too late.

“Goodwill can only be identified for an acquisition, by the way, at the actual acquisition date – that’s the only point in time at which the purchased goodwill could with any degree of specificity be identified,” said Kroeker. “Any subsequent point in time is arbitrary and is very difficult to identify if not impossible to that individual acquisition.”

Discussions on the topic are ongoing and currently geared at getting board “leanings” as opposed to firm votes. Board decisions could therefore change.

The deliberations are aimed at sketching a proposal to solicit public comment.


This article originally appeared in the January 27, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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