Tech acctg memo

Snapshot: Accounting for the impairment of goodwill and other long-lived assets

December 2012

Accounting for the impairment of goodwill and other long-lived assets is complex because there are different models depending

on the type of asset involved. Each model uses a different unit of account and each has a different impairment recognition

threshold. The frequency with which impairment must be assessed and the basis used to measure an impairment charge varies

across some of these models. To help with this complexity, we have prepared a snapshot of the relevant accounting guidance in

the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC). Additional explanations for certain

concepts in the snapshot are provided in the numbered notes that follow it.

Indefinite-lived intangible assets

Long-lived assets to be held and used1

Goodwill Long-lived assets to be

disposed of by sale

Codification topic ASC 350 ASC 360 ASC 350 ASC 360

Frequency Annual test is required, and interim test is necessary if triggers are present

Test is required only if triggers are present

Annual test is required, and interim test is necessary if triggers are present

Test is required if held-for- sale criteria are met

Unit of account In general, individual asset 2

Asset group 3 Reporting unit 4 Individual asset to be disposed of or a group of assets to be disposed of (i.e., disposal group)

Evaluated for impairment before unit of account

Not applicable Indefinite-lived intangible assets and other assets within the asset group 5

Indefinite-lived intangible assets, long-lived assets to be held and used and other assets within the reporting unit 5

Indefinite-lived intangible assets, goodwill and other assets within the disposal group 5

Single- or multi-step test

Single-step 6 Multi-step Multi-step Single-step

Impairment recognition

When the carrying amount is greater than fair value 6

When the carrying amount is greater than both the undiscounted cash flows (recoverability test) and fair value 7,8

When the carrying amount of the reporting unit (unless the carrying amount is zero or negative) is greater than its fair value (Step 1) and the carrying amount of goodwill is greater than its implied fair value (Step 2) 9-11

When the carrying amount is greater than fair value less costs to sell

Measurement The excess of the carrying amount over fair value

The excess of the carrying amount over fair value 8,12

The excess of the carrying amount of goodwill over its implied fair value 10

The excess of the carrying amount over fair value less costs to sell

Assurance Services

1. The types of assets covered by the caption “long-lived

assets to be held and used” include those long-lived assets

within the scope of ASC 360-10-15, such as property, plant

and equipment, assets under capital leases, amortizable

intangible assets, internal use software and long-term

prepaid assets.

2. In rare cases, the unit of account may be a combined group

of separately-recorded indefinite-lived intangible assets

that are essentially inseparable from one another.

3. The Master Glossary of the Codification defines an asset

group as “the lowest level for which identifiable cash flows

are largely independent of the cash flows of other groups

of assets and liabilities.” An asset group almost always

includes multiple assets. In other words, an asset group is

rarely a single asset.

4. The Master Glossary of the Codification defines a reporting

unit as “an operating segment or one level below an

operating segment (also known as a component)” (see

Note 13 for additional information). A reporting unit is not

the same as a reportable segment.

5. Other assets for this purpose might include accounts

receivable, inventory and equity-method investments.

6. FASB Accounting Standards Update (ASU) 2012-02,

Intangibles – Goodwill and Other (Topic 350): Testing

Indefinite-Lived Intangible Assets for Impairment, was

issued in July 2012 and is effective for annual and interim

impairment tests of indefinite-lived intangible assets

performed in fiscal years beginning after September

15, 2012. Prior to the effective date of ASU 2012-02, the

testing of indefinite-lived intangible assets for impairment

consists of a quantitative assessment of whether the

carrying amount of an indefinite-lived intangible asset is

greater than its fair value. After the effective date of ASU

2012-02, an entity can choose whether to first perform a

qualitative assessment of whether it is more likely than not

(a likelihood of more than 50 percent) that the indefinite-

lived intangible asset is impaired. Factors that should be

considered in performing the qualitative assessment are

included in ASC 350-30-35-18B (which was added by the

ASU). If the qualitative assessment shows that it is more

likely than not that the indefinite-lived intangible asset

is impaired, then the quantitative assessment must be

performed. Otherwise, the indefinite-lived intangible asset

impairment test is complete. Early adoption of ASU 2012-02

is permitted in certain situations.

7. An entity should not skip or disregard the comparison of

the asset group’s carrying amount and undiscounted cash

flows (i.e., the recoverability test). In other words, an entity

should not recognize an impairment charge for the excess

of the asset group’s carrying amount over its fair value if it

passes the recoverability test (i.e., the asset group’s carrying

amount is less than its undiscounted cash flows).

8. An asset group’s undiscounted cash flows and fair value will

be different amounts. Undiscounted cash flows do not take

the time value of money into consideration, whereas fair

value does take the time value of money into consideration.

In addition, undiscounted cash flows are estimated using

an entity-specific perspective while fair value is estimated

using a market-participant perspective.

9. An entity can choose whether to first perform a qualitative

assessment of whether it is more likely than not (a

likelihood of more than 50 percent) that the fair value

of a reporting unit is less than its carrying amount. If the

qualitative assessment shows that it is more likely than not

that the fair value of a reporting unit is less than its carrying

amount, then the entity must perform a quantitative

assessment of whether the carrying amount of the

reporting unit is greater than its fair value. If the qualitative

assessment shows that it is not more likely than not that

the fair value of a reporting unit is less than its carrying

amount, then the goodwill impairment test is complete.

10. The implied fair value of goodwill is determined in the

same manner as the amount of goodwill is determined

in the accounting for a business combination. An entity

measures the assets and liabilities in the reporting

unit (including any unrecognized intangible assets) as

if the reporting unit had been acquired in a business

combination, which results in the vast majority of the assets

and liabilities being measured at their fair values.

The excess, if any, of the fair value of a reporting unit

over the net sum of the fair values (and other measured

amounts) of the assets and liabilities in the reporting unit is

the implied fair value of goodwill.

11. If the carrying amount of a reporting unit is zero or

negative, then an impairment charge is recognized when

a qualitative assessment results in an entity concluding it

is more-likely-than-not that a goodwill impairment exists

(Step 1) and when the carrying amount of goodwill is

greater than its implied fair value (Step 2).

12. The impairment charge is allocated to the long-lived assets

in the asset group on a pro rata basis using the relative

carrying amounts of the assets. However, if the fair value

of a long-lived asset is determinable without undue cost

and effort, the carrying amount of that asset should not be

reduced below its fair value. Any unallocated loss as a result

of this limitation should be allocated to the other long-

lived assets in the asset group on a pro rata basis using the

relative adjusted carrying amounts of those assets.

13. The Master Glossary of the Codification defines an

operating segment as “a component of a public entity”

and refers to FASB ASC 280-10-50 for additional guidance

on what constitutes an operating segment. While the

definition refers to a public entity, this guidance is equally

applicable to a private entity when identifying reporting

units for purposes of its goodwill impairment testing. Based

on the guidance in FASB ASC 280-10-50, an operating

segment is a component of a public entity if it possesses all

of the following characteristics: (a) it engages in business

activities from which it may earn revenue and incur

expenses (including those resulting from intercompany

transactions), (b) its operating results are regularly reviewed

by the chief operating decision maker to make decisions

about resources to be allocated to the segment and assess

its performance and (c) its discrete financial information

is available. An operating segment is not the same as a

reportable segment.

Once operating segments are determined, they become the

starting point for determining reporting units. A reporting

unit will either be the same as the operating segment or

one level below it (a component of an operating segment)

but can never be on a more consolidated basis than the

operating segment. A component of an operating segment

must meet all of the following criteria to be considered

a reporting unit: (a) it constitutes a business, (b) its

discrete financial information is available and (c) segment

management regularly reviews its operating results.

The following McGladrey materials relating to the concepts

discussed in this paper can be found at

www.mcgladrey.com/assurance/accounting-resources

or by clicking on the links below:

• Qualitative impairment assessment of indefinite-lived

intangible assets

• FASB issues final standard on qualitative goodwill

impairment assessment

• Assigning assets and liabilities that relate to multiple

reporting units when testing goodwill for impairment

• Determination of reporting units when testing goodwill

for impairment

• Impairment testing of long-lived assets classified as

held and used

• A guide to accounting for business combinations –

second edition

800.274.3978 www.mcgladrey.com

Snapshot: Accounting for the impairment of goodwill and other long-lived assets is provided as an information service by McGladrey and results from the efforts and ideas of various McGladrey professionals, including members of the National Professional Standards Group. The information provided in this publication should not be construed as accounting, auditing, consulting or legal advice on any specific facts or circumstances. The contents are intended for general information purposes only. You are urged to consult your McGladrey service provider concerning your situation and any specific questions you may have. You may also contact us toll-free at 800.274.3978 for a contact person in your area.

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© December 2012 McGladrey LLP. All Rights Reserved.