ASC 350-20
Goodwill
350 Intangibles—Goodwill and Other
Source downloaded: .Record version 37283bac90de. Effective date must be checked in the source.
ASC 350-20 governs the accounting for goodwill after its initial recognition (initial recognition/measurement is in 805-30, 805-60, or 958-805) and prohibits capitalizing internally developed goodwill. Under the general model, goodwill is not amortized but is tested for impairment at least annually at the reporting unit level, with an optional qualitative "more likely than not" screen; if the quantitative test shows the reporting unit's carrying amount exceeds its fair value, a loss is recognized for that excess, capped at the goodwill allocated to the unit. Private companies and not-for-profit entities may elect accounting alternatives to amortize goodwill over 10 years or less and to test only upon a triggering event, and/or to evaluate triggering events only as of the end of each reporting period.
Key points (7)
- Goodwill shall not be amortized under the general model; it must be tested for impairment at least annually at the reporting unit level and between annual tests if an event makes it more likely than not that a reporting unit's fair value has fallen below its carrying amount (350-20-35-1; 35-28; 35-30); costs of internally developing goodwill are expensed as incurred (350-20-25-3).
- An entity may first perform an optional qualitative assessment of the events and circumstances listed in 350-20-35-3C(a) through (g) to decide whether the quantitative test is needed, and has an unconditional option to bypass it and go straight to the quantitative test (350-20-35-3A through 35-3B).
- The quantitative test compares the reporting unit's fair value with its carrying amount, including goodwill; if carrying amount exceeds fair value, an impairment loss equal to that excess is recognized, limited to the total goodwill allocated to the reporting unit, with a simultaneous-equation adjustment where goodwill is tax deductible (350-20-35-4; 35-8; 35-8B).
- Deferred income taxes are included in the reporting unit's carrying amount regardless of whether fair value assumes a taxable or nontaxable sale, and the entity must judge which assumption market participants would use (350-20-35-7; 35-25 through 35-27).
- After a goodwill impairment loss, the adjusted carrying amount is the new accounting basis and reversal of the loss is prohibited; other assets or asset groups tested at the same time are tested before goodwill (350-20-35-12 through 35-13; 35-31).
- Reporting units are determined using Topic 280: a component of an operating segment is a reporting unit if it is a business (or nonprofit activity) with discrete financial information regularly reviewed by segment management, and economically similar components must be aggregated (350-20-35-33 through 35-36).
- Private companies and NFPs may elect to amortize goodwill straight-line over 10 years or less and test at the entity or reporting unit level only upon a triggering event, and/or to evaluate triggering events only as of the end of each reporting period (350-20-15-4; 35-63; 35-65 through 35-66; 35-84).
For students. Exam questions almost always test the post-ASU 2017-04 single-step measurement: the loss equals carrying amount minus fair value of the reporting unit, capped at that unit's goodwill — there is no longer a Step 2 "implied fair value of goodwill" computation. Common misunderstandings are forgetting the goodwill cap, excluding deferred taxes from the reporting unit's carrying amount, and thinking impairment losses can later be reversed.
goodwillreporting unitannual impairment testqualitative assessmentmore likely than notgoodwill amortization accounting alternativetriggering event evaluationrelative fair value allocation
Machine-generated study aid for ASC 350-20. Check the source paragraphs below.
350-20-00Status
Source downloaded: .Record version 55bbf1a03209. Effective date must be checked in the source.
350-20-00-1
The following table identifies the changes made to this Subtopic.
350-20-05Overview and Background
Source downloaded: .Record version 809492275a3e. Effective date must be checked in the source.
350-20-05-1
This Subtopic addresses financial accounting and reporting for goodwill subsequent to its acquisition and for the cost of internally developing goodwill.
350-20-05-2
Subtopic 805-30 provides guidance on recognition and initial measurement of goodwill acquired in a business combination. Subtopic 958-805 provides guidance on recognition and initial measurement of goodwill acquired in an acquisition by a not-for-profit entity. Subtopic 805-60 provides guidance on the recognition and initial measurement of goodwill by a joint venture upon formation.
350-20-05-4
The guidance in this Subtopic is presented in the following two Subsections:
- aGeneral
- bAccounting Alternatives.
350-20-05-4A
Costs of developing, maintaining, or restoring internally generated goodwill should not be capitalized. For entities that do not elect the accounting alternative for amortizing goodwill included in the guidance in the Subsections outlined in paragraph 350-20-05-5A, goodwill that is recognized under the business combination guidance in Topic 805 and Subtopic 958-805 and goodwill that is recognized under the joint venture formation guidance in Subtopic 805-60should not be amortized. Instead, it should be tested for impairment at least annually in accordance with paragraphs .If the accounting alternative for a goodwill impairment triggering event evaluation is elected, a goodwill impairment triggering event shall be evaluated in accordance with paragraphs .
350-20-05-4B
This Subtopic also includes guidance on the following:
- aHow an entity should derecognize goodwill when it disposes of all or a portion of a reporting unit
- bHow goodwill should be presented in the balance sheet
- cHow impairment losses should be presented in the income statement
- dWhat disclosures about goodwill and related impairment considerations should be made in the notes to the financial statements.
Accounting Alternatives
350-20-05-5
The Accounting Alternatives Subsections of this Subtopic provide guidance for the following:
- a An entity within the scope of paragraph 350-20-15-4 that elects the accounting alternative for amortizing goodwill. If elected, this accounting alternative allows an eligible entity to amortize goodwill and test that goodwill for impairment upon a triggering event.
- b An entity within the scope of paragraph 350-20-15-4A that elects the accounting alternative for a goodwill impairment triggering event evaluation. If elected, this accounting alternative allows an eligible entity to evaluate goodwill impairment triggering events only as of the end of each reporting period.
350-20-05-5A
The accounting alternatives guidance can be found in the following paragraphs:
- a Scope and Scope Exceptions—paragraphs
- b Subsequent Measurement—paragraphs
- c Derecognition—paragraphs
- d Other Presentation Matters—paragraphs
- e Disclosure—paragraphs
- f Implementation Guidance and Illustrations—paragraphs .
350-20-05-6
An entity should continue to follow the applicable requirements in Topic 350 for other accounting and reporting matters related to goodwill that are not addressed in the Accounting Alternatives Subsections of this Subtopic.
350-20-15Scope and Scope Exceptions
Source downloaded: .Record version 9bc961ffae82. Effective date must be checked in the source.
Overall Guidance
350-20-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 350-10-15, with specific transaction qualifications noted below.
Transactions
350-20-15-2
The guidance in this Subtopic applies to the following transactions and activities:
- a
- bThe costs of internally developing goodwill and other unidentifiable intangible assets with indeterminate lives
- c
- dAmounts recognized as goodwill in applying the equity method of accounting and to the excess reorganization value recognized by entities that adopt fresh-start reporting in accordance with Topic 852.
- e
350-20-15-3
Although goodwill is an intangible asset, the term intangible asset is used in this Subtopic to refer to an intangible asset other than goodwill.
350-20-15-3A
Paragraphs , , , , , , and 323-10-35-13 provide guidance for an entity electing the accounting alternatives in this Subtopic. See paragraphs 350-20-65-2 and 350-20-65-4for transition guidance for private companies and not-for-profit entities on applying the accounting alternatives in Subtopic 350-20.
Accounting Alternatives
350-20-15-4
A private companyor not-for-profit entitymay make an accounting policy election to apply the accounting alternative for amortizing goodwill in this Subtopic. The guidance in the Accounting Alternatives Subsections of this Subtopic applies to the following transactions or activities:
- aGoodwill that an entity recognizes in a business combination in accordance with Subtopic 805-30, in an acquisition by a not-for-profit entity in accordance with Subtopic 958-805, or in a joint venture formation in accordance with Subtopic 805-60after it has been initially recognized and measured
- b
350-20-15-4A
A private company or not-for-profit entity may make an accounting policy election to apply the accounting alternative for a goodwill impairment triggering event evaluation to goodwill subsequently accounted for in accordance with Subtopic 350-20.
350-20-15-5
An entity within the scope of paragraph 350-20-15-4 or paragraph 350-20-15-4A that elects the accounting alternative for amortizing goodwill or the accounting alternative for goodwill impairment triggering event evaluation shall apply all of the related subsequent measurement, derecognition, other presentation matters, and disclosure requirements upon election. An accounting alternative, once elected, shall be applied to existing goodwill and to all additions to goodwill recognized in future transactions within the scope of that accounting alternative.
350-20-15-6
An entity that elects either of the accounting alternatives in this Subtopic is not required to elect or precluded from electing the other alternative.
350-20-25Recognition
Source downloaded: .Record version 58aa00208180. Effective date must be checked in the source.
350-20-25-1
See Subtopic 805-30 for guidance on recognition at acquisition of goodwill acquired in a business combination. See Subtopic 958-805 for guidance on recognition at acquisition of goodwill acquired in an acquisition by a not-for-profit entity. See Subtopic 805-60 for guidance on recognition of goodwill by a joint venture upon formation.
350-20-25-2
The excess reorganization value recognized by entities that adopt fresh-start reporting in accordance with Topic 852 shall be reported as goodwill and accounted for in the same manner as goodwill.
350-20-25-3
Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred.
350-20-35Subsequent Measurement
Source downloaded: .Record version 7dc68c5a1fe4. Effective date must be checked in the source.
Overall Accounting for Goodwill
350-20-35-1
Goodwill shall not be amortized. Instead, goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit. (Paragraphs provide guidance on determining reporting units.)
350-20-35-2
Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. However, an entity shall consider the related income tax effect from any tax deductible goodwill, if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss.
350-20-35-3
An entity may first assess qualitative factors, as described in paragraphs , to determine whether it is necessary to perform the quantitative goodwill impairment test discussed in paragraphs . If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).
Recognition and Measurement of an Impairment Loss
350-20-35-3A
An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill.
350-20-35-3B
An entity has an unconditional option to bypass the qualitative assessment described in the preceding paragraph for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period.
350-20-35-3C
In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances. Examples of such events and circumstances include the following:
- aMacroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
- bIndustry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity's products or services, or a regulatory or political development
- cCost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
- dOverall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
- eOther relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
- fEvents affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
- gIf applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
350-20-35-3D
If, after assessing the totality of events or circumstances such as those described in the preceding paragraph, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.
350-20-35-3E
If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform the quantitative goodwill impairment test.
350-20-35-3F
The examples included in paragraph 350-20-35-3C(a) through (g) are not all-inclusive, and an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of a reporting unit in determining whether to perform the quantitative goodwill impairment test. An entity shall consider the extent to which each of the adverse events and circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount. An entity should place more weight on the events and circumstances that most affect a reporting unit's fair value or the carrying amount of its net assets. An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity has a recent fair value calculation for a reporting unit, it also should include as a factor in its consideration the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the quantitative goodwill impairment test.
350-20-35-3G
An entity shall evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. None of the individual examples of events and circumstances included in paragraph 350-20-35-3C(a) through (g) are intended to represent standalone events or circumstances that necessarily require an entity to perform the quantitative goodwill impairment test. Also, the existence of positive and mitigating events and circumstances is not intended to represent a rebuttable presumption that an entity should not perform the quantitative goodwill impairment test.
350-20-35-4
The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill.
350-20-35-5
The guidance in paragraphs shall be considered in determining the fair value of a reporting unit.
350-20-35-6
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.
350-20-35-7
In determining the carrying amount of a reporting unit, deferred income taxes shall be included in the carrying amount of the reporting unit, regardless of whether the fair value of the reporting unit will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.
350-20-35-8
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the reporting unit, if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss.
350-20-35-8B
If a reporting unit has tax deductible goodwill, recognizing a goodwill impairment loss may cause a change in deferred taxes that results in the carrying amount of the reporting unit immediately exceeding its fair value upon recognition of the loss. In those circumstances, the entity shall calculate the impairment loss and associated deferred tax effect in a manner similar to that used in a business combination in accordance with the guidance in paragraphs . The total loss recognized shall not exceed the total amount of goodwill allocated to the reporting unit. See Example 2A in paragraphs for an illustration of the calculation.
350-20-35-12
After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis.
350-20-35-13
Subsequent reversal of a previously recognized goodwill impairment loss is prohibited once the measurement of that loss is recognized.
Determining the Fair Value of a Reporting Unit
350-20-35-22
The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. However, the market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole.
350-20-35-23
Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity's individual equity securities. An acquiring entity often is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. That control premium may cause the fair value of a reporting unit to exceed its market capitalization. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit.
350-20-35-24
In estimating the fair value of a reporting unit, a valuation technique based on multiples of earnings or revenue or a similar performance measure may be used if that technique is consistent with the objective of measuring fair value. Use of multiples of earnings or revenue in determining the fair value of a reporting unit may be appropriate, for example, when the fair value of an entity that has comparable operations and economic characteristics is observable and the relevant multiples of the comparable entity are known. Conversely, use of multiples would not be appropriate in situations in which the operations or activities of an entity for which the multiples are known are not of a comparable nature, scope, or size as the reporting unit for which fair value is being estimated.
350-20-35-25
Before estimating the fair value of a reporting unit, an entity shall determine whether that estimation should be based on an assumption that the reporting unit could be bought or sold in a nontaxable transaction or a taxable transaction. Making that determination is a matter of judgment that depends on the relevant facts and circumstances and must be evaluated carefully on a case-by-case basis (see Example 1 [paragraphs ]).
350-20-35-26
In making that determination, an entity shall consider all of the following:
- aWhether the assumption is consistent with those that marketplace participants would incorporate into their estimates of fair value
- bThe feasibility of the assumed structure
- cWhether the assumed structure results in the highest and best use and would provide maximum value to the seller for the reporting unit, including consideration of related tax implications.
350-20-35-27
In determining the feasibility of a nontaxable transaction, an entity shall consider, among other factors, both of the following:
- aWhether the reporting unit could be sold in a nontaxable transaction
- bWhether there are any income tax laws and regulations or other corporate governance requirements that could limit an entity's ability to treat a sale of the unit as a nontaxable transaction.
When to Test Goodwill for Impairment
350-20-35-28
Goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests in certain circumstances (see paragraph 350-20-35-30). The annual goodwill impairment test may be performed any time during the fiscal year provided the test is performed at the same time every year. Different reporting units may be tested for impairment at different times.
350-20-35-30
Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Paragraph 350-20-35-3C(a) through (g)includes examples of such events and circumstances. Paragraphs describe the process for making these evaluations.
- a
- b
- c
- d
- e
- f
- g
350-20-35-31
If goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.
350-20-35-32
This requirement applies to all assets that are tested for impairment, not just those included in the scope of the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.
Reporting Unit
350-20-35-33
The provisions of Topic 280 shall be used to determine the reporting units of an entity.
350-20-35-34
A component of an operating segment is a reporting unit if the component constitutes a business or a nonprofit activity for which discrete financial information is available and segment management, as that term is defined in paragraph 280-10-50-7, regularly reviews the operating results of that component. Subtopic 805-10 includes guidance on determining whether an asset group constitutes a business. Throughout the remainder of this Section, the term business also includes a nonprofit activity.
350-20-35-35
However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Paragraph 280-10-50-11 shall be considered in determining if the components of an operating segment have similar economic characteristics.
350-20-35-36
An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if it comprises only a single component.
350-20-35-37
Reporting units will vary depending on the level at which performance of the segment is reviewed, how many businesses the operating segment includes, and the similarity of those businesses. In other words, a reporting unit could be the same as an operating segment, which could be the same as a reportable segment, which could be the same as the entity as a whole (entity level).
350-20-35-38
An entity that is not required to report segment information in accordance with Topic 280 is nonetheless required to test goodwill for impairment at the reporting unit level. That entity shall use the guidance in paragraphs to determine its operating segments for purposes of determining its reporting units.
Assigning Acquired Assets and Assumed Liabilities to a Reporting Unit
350-20-35-39
For the purpose of testing goodwill for impairment, acquired assets and assumed liabilities shall be assigned to a reporting unit as of the acquisition date if both of the following criteria are met:
- aThe asset will be employed in or the liability relates to the operations of a reporting unit.
- bThe asset or liability will be considered in determining the fair value of the reporting unit.
350-20-35-39A
Foreign currency translation adjustments should not be allocated to a reporting unit from an entity's accumulated other comprehensive income. The reporting unit's carrying amount should include only the currently translated balances of the assets and liabilities assigned to the reporting unit.
350-20-35-40
Some assets or liabilities may be employed in or relate to the operations of multiple reporting units. The methodology used to determine the amount of those assets or liabilities to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner. For example, assets and liabilities not directly related to a specific reporting unit, but from which the reporting unit benefits, could be assigned according to the benefit received by the different reporting units (or based on the relative fair values of the different reporting units). In the case of pension items, for example, a pro rata assignment based on payroll expense might be used. A reasonable allocation method may be very general. For use in making those assignments, the basis for and method of determining the fair value of the acquiree and other related factors (such as the underlying reasons for the acquisition and management's expectations related to dilution, synergies, and other financial measurements) shall be documented at the acquisition date.
Assigning Goodwill to Reporting Units
350-20-35-41
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination or recognized by a joint venture upon formation shall be assigned to one or more reporting units as of the acquisition date or the joint venture formation date. Goodwill shall be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner. In addition, that methodology shall be consistent with the objectives of the process of assigning goodwill to reporting units described in paragraphs .
350-20-35-42
In concept, the amount of goodwill assigned to a reporting unit would be determined in a manner similar to how the amount of goodwill recognized in a business combination is determined. That is:
- aAn entity would determine the fair value of the acquired business (or portion thereof) to be included in a reporting unit—the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit. Subtopic 805-20 provides guidance on assigning the fair value of the acquiree to the assets acquired and liabilities assumed in a business combination.
- bAny excess of the fair value of the acquired business (or portion thereof) over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit is the amount of goodwill assigned to that reporting unit.
- c
350-20-35-43
If goodwill is to be assigned to a reporting unit that has not been assigned any of the assets acquired or liabilities assumed in that acquisition, the amount of goodwill to be assigned to that unit might be determined by applying a with-and-without computation. That is, the difference between the fair value of that reporting unit before the acquisition and its fair value after the acquisition represents the amount of goodwill to be assigned to that reporting unit.
350-20-35-44
This Subtopic does not require that goodwill and all other related assets and liabilities assigned to reporting units for purposes of testing goodwill for impairment be reflected in the entity's reported segments. However, even though an asset may not be included in reported segment assets, the asset (or liability) shall be allocated to a reporting unit for purposes of testing for impairment if it meets the criteria in paragraph 350-20-35-39.
Reorganization of Reporting Structure
350-20-35-45
When an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, the guidance in paragraphs shall be used to reassign assets and liabilities to the reporting units affected. However, goodwill shall be reassigned to the reporting units affected using a relative fair value allocation approach similar to that used when a portion of a reporting unit is to be disposed of (see paragraphs ).
350-20-35-46
For example, if existing reporting unit A is to be integrated with reporting units B, C, and D, goodwill in reporting unit A would be assigned to units B, C, and D based on the relative fair values of the three portions of reporting unit A prior to those portions being integrated with reporting units B, C, and D.
350-20-35-47
Subsidiary goodwill might arise from any of the following:
- aAcquisitions that a subsidiary made prior to its being acquired by the parent
- bAcquisitions that a subsidiary made subsequent to its being acquired by the parent
- cGoodwill arising from the business combination in which a subsidiary was acquired that the parent pushed down to the subsidiary's financial statements.
350-20-35-48
All goodwill recognized by a public or nonpublic subsidiary (subsidiary goodwill) in its separate financial statements that are prepared in accordance with generally accepted accounting principles (GAAP) shall be accounted for in accordance with this Subtopic. Subsidiary goodwill shall be tested for impairment at the subsidiary level using the subsidiary's reporting units. If a goodwill impairment loss is recognized at the subsidiary level, goodwill of the reporting unit or units (at the higher consolidated level) in which the subsidiary's reporting unit with impaired goodwill resides must be tested for impairment if the event that gave rise to the loss at the subsidiary level would more likely than not reduce the fair value of the reporting unit (at the higher consolidated level) below its carrying amount (see paragraph 350-20-35-3C(f)). Only if goodwill of that higher-level reporting unit is impaired would a goodwill impairment loss be recognized at the consolidated level.
350-20-35-49
If testing at the consolidated level leads to an impairment loss, that loss shall be recognized at that level separately from the subsidiary's loss.
350-20-35-51
See paragraphs for guidance on disposal of all or a portion of a reporting unit.
350-20-35-57A
If a reporting unit is less than wholly owned, the fair value of the reporting unit as a whole shall be determined in accordance with paragraphs , including any portion attributed to the noncontrolling interest. Any impairment loss measured in the goodwill impairment test shall be attributed to the parent and the noncontrolling interest on a rational basis. If the reporting unit includes only goodwill attributable to the parent, the goodwill impairment loss would be attributed entirely to the parent. However, if the reporting unit includes goodwill attributable to both the parent and the noncontrolling interest, the goodwill impairment loss shall be attributed to both the parent and the noncontrolling interest.
350-20-35-57B
If all or a portion of a less-than-wholly-owned reporting unit is disposed of, the gain or loss on disposal shall be attributed to the parent and the noncontrolling interest.
350-20-35-58
The portion of the difference between the cost of an investment and the amount of underlying equity in net assets of an equity method investee that is recognized as goodwill in accordance with paragraph 323-10-35-13 (equity method goodwill) shall not be amortized.
350-20-35-59
However, equity method goodwill shall not be reviewed for impairment in accordance with this Subtopic. Equity method investments shall continue to be reviewed for impairment in accordance with paragraph 323-10-35-32.
Deferred Income Taxes
350-20-35-61
Paragraph states that deferred income taxes are not recognized for any portion of goodwill for which amortization is not deductible for income tax purposes. For guidance on recognition of deferred income taxes related to goodwill when amortization of goodwill is deductible for tax purposes, see paragraphs .
Accounting Alternatives
Accounting Alternative for Amortizing Goodwill
350-20-35-62
The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for amortizing goodwill.
350-20-35-63
Goodwill relating to each business combination, acquisition by a not-for-profit entity, joint venture formation, or reorganization event resulting in fresh-start reporting (amortizable unit of goodwill) shall be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate.
350-20-35-64
An entity may revise the remaining useful life of goodwill upon the occurrence of events and changes in circumstances that warrant a revision to the remaining period of amortization. However, the cumulative amortization period for any amortizable unit of goodwill cannot exceed 10 years. If the estimate of the remaining useful life of goodwill is revised, the remaining carrying amount of goodwill shall be amortized prospectively on a straight-line basis over that revised remaining useful life.
350-20-35-65
Upon adoption of this accounting alternative, an entity shall make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level. An entity that elects to perform its impairment tests at the reporting unit level shall refer to paragraphs and paragraphs to determine the reporting units of an entity.
350-20-35-66
Goodwill of an entity (or a reporting unit) shall be tested for impairment if an event occurs or circumstances change that indicate that the fair value of the entity (or the reporting unit) may be below its carrying amount (a triggering event). Paragraph 350-20-35-3C(a) through (g) includes examples of those events or circumstances. Those examples are not all-inclusive, and an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of the entity (or of a reporting unit) in determining whether to perform the goodwill impairment test. For those entities that have elected the accounting alternative for a goodwill impairment triggering event evaluation in paragraph 350-20-35-84, a goodwill triggering event evaluation shall be performed only as of the end of each reporting period. If an entity determines that there are no triggering events, then further testing is unnecessary.
350-20-35-67
Upon the occurrence of a triggering event, an entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. Paragraph 350-20-35-3C(a) through (g) includes examples of those qualitative factors.
350-20-35-68
Because the examples included in paragraph 350-20-35-3C(a) through (g) are not all-inclusive, an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of the entity (or of the reporting unit) in determining whether to perform the quantitative goodwill impairment test. An entity shall consider the extent to which each of the adverse events and circumstances identified could affect the comparison of its fair value with its carrying amount (or of the reporting unit's fair value with the reporting unit's carrying amount). An entity should place more weight on the events and circumstances that most affect its fair value or the carrying amount of its net assets (or the reporting unit's fair value or the carrying amount of the reporting unit's net assets). An entity also should consider positive and mitigating events and circumstances that may affect its determination of whether it is more likely than not that its fair value is less than its carrying amount (or the fair value of the reporting unit is less than the carrying amount of the reporting unit). If an entity has a recent fair value calculation (or recent fair value calculation for the reporting unit), it also should include that calculation as a factor in its consideration of the difference between the fair value and the carrying amount in reaching its conclusion about whether to perform the quantitative goodwill impairment test.
350-20-35-69
An entity shall evaluate, on the basis of the weight of evidence, the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount. None of the individual examples of events and circumstances included in paragraph 350-20-35-3C(a) through (g) are intended to represent standalone events or circumstances that necessarily require an entity to perform the quantitative goodwill impairment test. Also, the existence of positive and mitigating events and circumstances is not intended to represent a rebuttable presumption that an entity should not perform the quantitative goodwill impairment test.
350-20-35-70
An entity has an unconditional option to bypass the qualitative assessment described in paragraphs and proceed directly to a quantitative calculation by comparing the entity's (or the reporting unit's) fair value with its carrying amount (see paragraphs ). An entity may resume performing the qualitative assessment upon the occurrence of any subsequent triggering events.
350-20-35-71
If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is not more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount, further testing is unnecessary.
350-20-35-72
If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount or if the entity elected to bypass the qualitative assessment in paragraphs , the entity shall determine the fair value of the entity (or the reporting unit) and compare the fair value of the entity (or the reporting unit) with its carrying amount, including goodwill. A goodwill impairment loss shall be recognized if the carrying amount of the entity (or the reporting unit) exceeds its fair value.
350-20-35-73
A goodwill impairment loss, if any, shall be measured as the amount by which the carrying amount of an entity (or a reporting unit) including goodwill exceeds its fair value, limited to the total amount of goodwill of the entity (or allocated to the reporting unit). Additionally, an entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the entity (or the reporting unit), if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss. See Example 2A in paragraph 350-20-55-23A for an illustration.
350-20-35-74
The guidance in paragraphs shall be considered in determining the fair value of the entity (or the reporting unit).
350-20-35-75
The guidance in paragraphs shall be considered in assigning acquired assets (including goodwill) and assumed liabilities to the reporting unit when determining the carrying amount of a reporting unit.
350-20-35-76
For an entity subject to the requirements of Topic 740 on income taxes, when determining the carrying amount of an entity (or a reporting unit), deferred income taxes shall be included in the carrying amount of an entity (or the reporting unit), regardless of whether the fair value of the entity (or the reporting unit) will be determined assuming it would be bought or sold in a taxable or nontaxable transaction.
350-20-35-77
The goodwill impairment loss, if any, shall be allocated to individual amortizable units of goodwill of the entity (or the reporting unit) on a pro rata basis using their relative carrying amounts or using another reasonable and rational basis.
350-20-35-78
After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis, which shall be amortized over the remaining useful life of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.
350-20-35-79
If goodwill and another asset (or asset group) of the entity (or the reporting unit) are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 on property, plant, and equipment (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test. If the asset group is impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.
350-20-35-80
The requirement in the preceding paragraph applies to all assets that are tested for impairment, not just those included in the scope of the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10.
350-20-35-81
The portion of the difference between the cost of an investment and the amount of underlying equity in net assets of an equity method investee that is recognized as goodwill in accordance with paragraph 323-10-35-13 (equity method goodwill) shall be amortized on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate.
350-20-35-82
However, equity method goodwill shall not be reviewed for impairment in accordance with this Subtopic. Equity method investments shall continue to be reviewed for impairment in accordance with paragraph 323-10-35-32.
Accounting Alternative for a Goodwill Impairment Triggering Event Evaluation
350-20-35-83
The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4A that elect the accounting alternative for a goodwill impairment triggering event evaluation.
350-20-35-84
An entity may elect to perform its goodwill impairment triggering event evaluation only as of the end of each reporting period, whether the reporting period is an interim or annual period. That is, the entity would not evaluate goodwill impairment triggering events and measure any related impairment during the reporting period. An entity electing the accounting alternative shall assess whether events or circumstances have occurred that would require an entity to test goodwill for impairment as follows:
- aFor an entity that has elected the accounting alternative for amortizing goodwill, the entity's evaluation of a triggering event, as described in paragraph 350-20-35-66, shall be performed only as of each reporting date.
- bFor an entity that has not elected the accounting alternative for amortizing goodwill:
- 1If the entity performs its annual goodwill impairment test as of the end of the reporting period, the entity shall not evaluate its goodwill for impairment during the reporting period as described in paragraph 350-20-35-30.
- 2If the entity performs its annual goodwill impairment test on a date other than the end of the reporting period (in accordance with paragraph 350-20-35-28), the entity's evaluation of impairment between annual goodwill impairment tests (as described in paragraph 350-20-35-30) shall be performed only as of the end of a reporting period.
- 1
350-20-35-85
An entity electing this accounting alternative shall apply it only to goodwill evaluated in accordance with this Subtopic. This accounting alternative does not change the following:
- aThe requirement to assess other assets for impairment (for example, long-lived assets and indefinite-lived intangibles) under existing guidance. If the impairment test related to other assets would have resulted in a goodwill impairment triggering event, an entity electing this accounting alternative should consider the results of an impairment test related to other assets in connection with its goodwill impairment test only as of its annual goodwill impairment testing date and the reporting date, whether that date is an interim or annual reporting date, as applicable.
- bThe requirements to test the remaining goodwill for impairment if only a portion of goodwill is allocated to a business or nonprofit activity to be disposed of in accordance with paragraph 350-20-40-7.
350-20-35-86
An entity shall not apply this guidance retroactively to interim periods for which annual financial statements have already been issued.
350-20-40Derecognition
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Disposal of All or a Portion of a Reporting Unit
350-20-40-1
When a reporting unit is to be disposed of in its entirety, goodwill of that reporting unit shall be included in the carrying amount of the reporting unit in determining the gain or loss on disposal.
350-20-40-2
When a portion of a reporting unit that constitutes a business (see Section 805-10-55) or nonprofit activityis to be disposed of, goodwill associated with that business or nonprofit activity shall be included in the carrying amount of the business or nonprofit activity in determining the gain or loss on disposal.
350-20-40-3
The amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business or nonprofit activity to be disposed of and the portion of the reporting unit that will be retained. For example, if a reporting unit with a fair value of $400 is selling a business or nonprofit activity for $100 and the fair value of the reporting unit excluding the business or nonprofit activity being sold is $300, 25 percent of the goodwill residing in the reporting unit would be included in the carrying amount of the business or nonprofit activity to be sold.
350-20-40-4
However, if the business or nonprofit activity to be disposed of was never integrated into the reporting unit after its acquisition and thus the benefits of the acquired goodwill were never realized by the rest of the reporting unit, the current carrying amount of that acquired goodwill shall be included in the carrying amount of the business or nonprofit activity to be disposed of.
350-20-40-5
That situation might occur when the acquired business or nonprofit activity is operated as a standalone entity or when the business or nonprofit activity is to be disposed of shortly after it is acquired.
350-20-40-6
Situations in which the acquired business or nonprofit activity is operated as a standalone entity are expected to be infrequent because some amount of integration generally occurs after an acquisition.
350-20-40-7
When only a portion of goodwill is allocated to a business or nonprofit activity to be disposed of, the goodwill remaining in the portion of the reporting unit to be retained shall be tested for impairment in accordance with paragraphs using its adjusted carrying amount.
Accounting Alternatives
350-20-40-8
The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for amortizing goodwill.
Disposal of a Portion of an Entity (or a Reporting Unit)
350-20-40-9
When a portion of an entity (or a reporting unit) that constitutes a business or nonprofit activity is to be disposed of, goodwill associated with that business or nonprofit activity shall be included in the carrying amount of the business or nonprofit activity in determining the gain or loss on disposal. An entity shall use a reasonable and rational approach to determine the amount of goodwill associated with the business or nonprofit activity to be disposed of.
350-20-45Other Presentation Matters
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350-20-45-1
The aggregate amount of goodwill shall be presented as a separate line item in the statement of financial position.
350-20-45-2
The aggregate amount of goodwill impairment losses shall be presented as a separate line item in the income statement before the subtotal income from continuing operations (or similar caption) unless a goodwill impairment loss is associated with a discontinued operation.
350-20-45-3
A goodwill impairment loss associated with a discontinued operation shall be included (on a net-of-tax basis) within the results of discontinued operations. For guidance on reporting discontinued operations, see Subtopic 205-20.
Accounting Alternatives
350-20-45-4
The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for amortizing goodwill.
350-20-45-5
The aggregate amount of goodwill net of accumulated amortization and impairment shall be presented as a separate line item in the statement of financial position.
350-20-45-6
The amortization and aggregate amount of impairment of goodwill shall be presented in income statement or statement of activities line items within continuing operations (or similar caption) unless the amortization or a goodwill impairment loss is associated with a discontinued operation.
350-20-45-7
The amortization and impairment of goodwill associated with a discontinued operation shall be included (on a net-of-tax basis) within the results of discontinued operations.
350-20-50Disclosure
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Information for Each Period for Which a Statement of Financial Position Is Presented
350-20-50-1
The changes in the carrying amount of goodwill during the period shall be disclosed, showing separately (see Example 3 [paragraph 350-20-55-24]):
- aThe gross amount and accumulated impairment losses at the beginning of the period
- bAdditional goodwill recognized during the period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with paragraph 360-10-45-9
- cAdjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with paragraphs and 805-740-45-2
- dGoodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale
- eImpairment losses recognized during the period in accordance with this Subtopic
- fNet exchange differences arising during the period in accordance with Topic 830
- gAny other changes in the carrying amounts during the period
- hThe gross amount and accumulated impairment losses at the end of the period.
350-20-50-1A
Entities that have one or more reporting units with zero or negative carrying amounts of net assets shall disclose those reporting units with allocated goodwill and the amount of goodwill allocated to each and in which reportable segment the reporting unit is included.
Goodwill Impairment Loss
350-20-50-2
For each goodwill impairment loss recognized, all of the following information shall be disclosed in the notes to the financial statements that include the period in which the impairment loss is recognized:
- aA description of the facts and circumstances leading to the impairment
- bThe amount of the impairment loss and the method of determining the fair value of the associated reporting unit (whether based on quoted market prices, prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination thereof)
- c
350-20-50-3
The quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination.
Accounting Alternatives
350-20-50-3A
The information in paragraphs shall be disclosed in the notes to financial statements for any entity within the scope of paragraph 350-20-15-4 that elects the accounting alternative for amortizing goodwill.
350-20-50-3B
An entity within the scope of paragraph 350-20-15-4A that elects the accounting alternative for a goodwill impairment triggering event evaluation shall disclose its use of the alternative as a significant accounting policy in accordance with paragraph 235-10-50-1.
Disclosures about Additions to Goodwill
350-20-50-4
The following information shall be disclosed in the notes to financial statements for any additions to goodwill in each period for which a statement of financial position is presented:
- aThe amount assigned to goodwill in total and by major business combination, by major acquisition by a not-for-profit entity, by joint venture formation, or by reorganization event resulting in fresh-start reporting
- bThe weighted-average amortization period in total and the amortization period by major business combination, by major acquisition by a not-for-profit entity, by joint venture formation, or by reorganization event resulting in fresh-start reporting.
Information for Each Period for Which a Statement of Financial Position Is Presented
350-20-50-5
The following information shall be disclosed in the financial statements or the notes to financial statements for each period for which a statement of financial position is presented:
- aThe gross carrying amounts of goodwill, accumulated amortization, and accumulated impairment loss
- bThe aggregate amortization expense for the period
- cGoodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale.
Goodwill Impairment Loss
350-20-50-6
For each goodwill impairment loss recognized, the following information shall be disclosed in the notes to financial statements that include the period in which the impairment loss is recognized:
- aA description of the facts and circumstances leading to the impairment
- bThe amount of the impairment loss and the method of determining the fair value of the entity or the reporting unit (whether based on prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination of those methods)
- cThe caption in the income statement or statement of activities in which the impairment loss is included
- dThe method of allocating the impairment loss to the individual amortizable units of goodwill.
350-20-50-7
The quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination, an acquisition by not-for-profit entity, or a joint venture formation.
350-20-55Implementation Guidance and Illustrations
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Implementation Guidance
350-20-55-1
Determining whether a component of an operating segment is a reporting unit is a matter of judgment based on an entity's individual facts and circumstances. Although paragraphs includes a number of characteristics that must be present for a component of an operating segment to be a reporting unit, no single factor or characteristic is determinative. How an entity manages its operations and how an acquired entity is integrated with the acquiring entity are key to determining the reporting units of the entity.
350-20-55-2
The characteristics identified in paragraphs that must be present for a component to be a reporting unit are discussed in the following implementation guidance.
350-20-55-3
The determination of whether a component constitutes a business or a nonprofit activity requires judgment based on specific facts and circumstances. The guidance in Section 805-10-55 should be considered in determining whether a group of assets constitutes a business or a nonprofit activity.
350-20-55-4
The term discrete financial information should be applied in the same manner that it is applied in determining operating segments in accordance with paragraph 280-10-50-1. That guidance indicates that it is not necessary that assets be allocated for a component to be considered an operating segment (that is, no balance sheet is required). Thus, discrete financial information can constitute as little as operating information. Therefore, in order to test goodwill for impairment in accordance with this Subtopic, an entity may be required to assign assets and liabilities to reporting units (consistent with the guidance in paragraphs ).
350-20-55-5
Segment management, as defined in paragraphs , is either a level below or the same level as the chief operating decision maker. According to Topic 280, a segment manager is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment. The approach used in this Subtopic to determine reporting units is similar to the one used to determine operating segments; however, this Subtopic focuses on how operating segments are managed rather than how the entity as a whole is managed; that is, reporting units should reflect the way an entity manages its operations.
350-20-55-6
Evaluating whether two components have similar economic characteristics is a matter of judgment that depends on specific facts and circumstances. That assessment should be more qualitative than quantitative.
350-20-55-7
In determining whether the components of an operating segment have similar economic characteristics, all of the factors in paragraph 280-10-50-11 should be considered. However, every factor need not be met in order for two components to be considered economically similar. In addition, the determination of whether two components are economically similar need not be limited to consideration of the factors described in that paragraph. In determining whether components should be combined into one reporting unit based on their economic similarities, factors that should be considered in addition to those in that paragraph include but are not limited to, the following:
- aThe manner in which an entity operates its business or nonprofit activity and the nature of those operations
- bWhether goodwill is recoverable from the separate operations of each component business (or nonprofit activity) or from two or more component businesses (or nonprofit activities) working in concert (which might be the case if the components are economically interdependent)
- cThe extent to which the component businesses (or nonprofit activities) share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms
- dWhether the components support and benefit from common research and development projects.
350-20-55-8
Components that share similar economic characteristics but relate to different operating segments may not be combined into a single reporting unit. For example, an entity might have organized its operating segments on a geographic basis. If its three operating segments (Americas, Europe, and Asia) each have two components (A and B) that are dissimilar to each other but similar to the corresponding components in the other operating segments, the entity would not be permitted to combine component A from each of the operating segments to make reporting unit A.
350-20-55-9
If two operating segments have been aggregated into a reportable segment by applying the aggregation criteria in paragraph 280-10-50-11, it would be possible for one or more of those components to be economically dissimilar from the other components and thus be a reporting unit for purposes of testing goodwill for impairment. That situation might occur if an entity's operating segments are based on geographic areas. The following points need to be considered in addressing this circumstance:
- aThe determination of reporting units under this Subtopic begins with the definition of an operating segment in paragraph 280-10-50-1 and considers disaggregating that operating segment into economically dissimilar components for the purpose of testing goodwill for impairment. The determination of reportable segments under Topic 280 also begins with an operating segment, but considers whether certain economically similar operating segments should be aggregated into a single operating segment or into a reportable segment.
- bThe level at which operating performance is reviewed differs between this Subtopic and Topic 280. It is the chief operating decision maker who reviews operating segments and the segment manager who reviews reporting units (components of operating segments). Therefore, a component of an operating segment would not be considered an operating segment for purposes of that Topic unless the chief operating decision maker regularly reviews its operating performance; however, that same component might be a reporting unit under this Subtopic if a segment manager regularly reviews its operating performance (and if other reporting unit criteria are met).
Illustrations
350-20-55-10
This Example illustrates the effect of a nontaxable transaction on the impairment test of goodwill. The Example may not necessarily be indicative of actual income tax liabilities that would arise in the sale of a reporting unit or the relationship of those liabilities in a taxable versus nontaxable structure.
350-20-55-11
Entity A is performing a goodwill impairment test relative to Reporting Unit at December 31, 20X2. Reporting Unit has the following assets and liabilities:
- aNet assets (excluding goodwill and deferred income taxes) of $60 with a tax basis of $35
- bGoodwill of $40
- cNet deferred tax liabilities of $10.
350-20-55-12
Entity A believes that it is feasible to sell Reporting Unit in either a nontaxable or a taxable transaction. Entity A could sell Reporting Unit for $80 in a nontaxable transaction or $90 in a taxable transaction. If Reporting Unit were sold in a nontaxable transaction, Entity A would have a current tax payable resulting from the sale of $10. Assuming a tax rate of 40 percent, if Reporting Unit were sold in a taxable transaction, Entity A would have a current tax payable resulting from the sale of $22 ([$90 - 35] × 40%).
350-20-55-13
In the quantitative impairment test in paragraphs , Entity A concludes that market participants would act in their economic best interest by selling Reporting Unit in a nontaxable transaction based on the following evaluation of its expected after-tax proceeds.
Nontaxable Taxable Gross proceeds (fair value) $80 $90 Less: taxes arising from transaction (10) (22) Value to Entity A $70 $68
350-20-55-14
In the quantitative impairment test, Entity A would determine the carrying amount of Reporting Unit as follows.
Net assets $60 Goodwill 40 Deferred taxes (10) Carrying value $90
350-20-55-15
The goodwill allocated to Reporting Unit is determined to be impaired because Reporting Unit's carrying value ($90) exceeds its fair value ($80 assuming a nontaxable transaction).
350-20-55-16
Reporting Unit must recognize the full goodwill impairment loss of $10 (determined as the excess of the carrying amount of Reporting Unit of $90 compared with its fair value of $80) because the $10 impairment loss does not exceed the $40 carrying amount of the goodwill allocated to Reporting Unit.
350-20-55-17
This Example illustrates the effect of a taxable transaction on the impairment test of goodwill. The Example may not necessarily be indicative of actual income tax liabilities that would arise in the sale of a reporting unit or the relationship of those liabilities in a taxable versus nontaxable structure.
350-20-55-18
Entity A is performing a goodwill impairment test relative to Reporting Unit at December 31, 20X2. Reporting Unit has the following assets and liabilities:
- aNet assets (excluding goodwill and deferred income taxes) of $60 with a tax basis of $35
- bGoodwill of $40
- cNet deferred tax liabilities of $10.
350-20-55-19
Entity A believes that it is feasible to sell Reporting Unit in either a nontaxable or a taxable transaction. Entity A could sell Reporting Unit for $65 in a nontaxable transaction or $80 in a taxable transaction. If Reporting Unit were sold in a nontaxable transaction, Entity A would have a current tax payable resulting from the sale of $4. Assuming a tax rate of 40 percent, if Reporting Unit were sold in a taxable transaction, Entity A would have a current tax payable resulting from the sale of $18 ([$80 - 35] × 40%).
350-20-55-20
In the quantitative impairment test in paragraphs , Entity A concludes that market participants would act in their economic best interest by selling Reporting Unit in a taxable transaction. This conclusion was based on the following.
Nontaxable Transaction Taxable Transaction Gross proceeds (fair value) $65 $80 Less: taxes arising from transaction (4) (18) Value to Entity A $61 $62
350-20-55-21
Deferred taxes related to the net assets of Reporting Unit should be included in the carrying value of Reporting Unit. Accordingly, in the quantitative impairment test Entity A would determine the carrying amount of Reporting Unit as follows.
Net assets $60 Goodwill 40 Deferred income taxes (10) Carrying value $90
350-20-55-22
The goodwill allocated to Reporting Unit is determined to be impaired because Reporting Unit's carrying amount ($90) exceeds its fair value ($80).
350-20-55-23
Reporting Unit must recognize the full goodwill impairment loss of $10 (determined as the excess of the carrying amount of Reporting Unit of $90 compared with its fair value of $80) because the $10 impairment loss does not exceed the $40 carrying amount of the goodwill allocated to Reporting Unit.
350-20-55-23A
Goodwill is deductible for tax purposes for some business combinations in certain jurisdictions. In those jurisdictions, a deferred tax asset or deferred tax liability is recorded upon acquisition on the basis of the difference between the book basis and the tax basis of goodwill. When goodwill of a reporting unit is tax deductible, the impairment of goodwill creates a cycle of impairment because the decrease in the book value of goodwill increases the deferred tax asset (or decreases the deferred tax liability) such that the carrying amount of the reporting unit increases. However, there is no corresponding increase in the fair value of the reporting unit and this could trigger another impairment test.
350-20-55-23B
This Example illustrates the use of a simultaneous equation when tax deductible goodwill is present to account for the increase in the carrying amount from the deferred tax benefit.
- Beta Entity has goodwill from an acquisition in Reporting Unit X. All of the goodwill allocated to Reporting Unit X is tax deductible. On October 1, 20X6 (the date of the annual impairment test for the reporting unit), Reporting Unit X had a book value of goodwill of $400, which is all tax deductible, deferred tax assets of $200 relating to the tax-deductible goodwill, and book value of other net assets of $400. Reporting Unit X is subject to a 40 percent income tax rate. Beta Entity estimated the fair value of Reporting Unit X at $900.
Carrying Amount Fair Value Preliminary Impairment Preliminary Deferred Tax Adjustment Carrying Amount after Preliminary Impairment Goodwill $400 $ - $(100) $ - $300 Deferred taxes 200 - - 40 240 Other net assets 400 - - - 400 Total " $1,000 " $900 $(100) $40 $940
350-20-55-23C
In the Example above, the carrying amount of Reporting Unit X immediately after the impairment charge exceeds its fair value by the amount of the increase in the deferred tax asset calculated as 40 percent of the impairment charge. To address the circular nature of the carrying amount exceeding the fair value, instead of continuing to calculate impairment on the excess of carrying amount over fair value until those amounts are equal, Beta Entity would apply the simultaneous equation demonstrated in paragraphs to Reporting Unit X, as follows.
Simultaneous equation: [tax rate/(1 - tax rate)] × (preliminary temporary difference) = deferred tax asset Equation for this example: 40%/(1 - 40%) × 100 = 67 Carrying Amount Fair Value Preliminary Impairment Adjustment for Equation Carrying Amount after Impairment Goodwill $400 $ - $(100) $(67) $233 Deferred taxes 200 - - 67 267 Other net assets 400 - - - 400 Total " $1,000 " $900 $(100) $0 $900
350-20-55-23D
The company would report a $167 goodwill impairment charge partially offset by a $67 deferred tax benefit recognized in the income tax line. If the impairment charge calculated using the equation exceeds the total goodwill allocated to a reporting unit, the total impairment charge would be limited to the goodwill amount.
350-20-55-24
In accordance with paragraphs , the following disclosures would be made by Theta Entity in its December 31, 20X3 financial statements relating to goodwill.
- Theta Entity has three reporting units with goodwill—Software, Electronics, and Communications—and two reportable segments—Technology and Communications. The Electronics reporting unit has a negative carrying amount.
- Note C: Goodwill
- The changes in the carrying amount of goodwill for the year ended December 31, 20X3, are as follows.
($000s) "Technology Segment" "Communications Segment" Total "Balance as of January 1, 20X3" Goodwill " $1,413 " " $1,104 " " $2,517 " Accumulated impairment losses - (200) (200) "1,413" 904 " 2,317 " Goodwill acquired during year 189 115 304 Impairment losses - (46) (46) Goodwill written off related to sale of business unit (484) - (484) "Balance as of December 31, 20X3" Goodwill " 1,118 " " 1,219 " " 2,337 " Accumulated impairment losses - (246) (246) " $1,118 " $973 " $2,091 "
- The Communications segment is tested for impairment in the third quarter, after the annual forecasting process. Due to an increase in competition in the Texas and Louisiana cable industry, operating profits and cash flows were lower than expected in the fourth quarter of 20X2 and the first and second quarters of 20X3. Based on that trend, the earnings forecast for the next five years was revised. In September 20X3, a goodwill impairment loss of $46 was recognized in the Communications reporting unit. The fair value of that reporting unit was estimated using the expected present value of future cash flows.
- The Electronics reporting unit to which $498 of goodwill is allocated had a negative carrying amount on December 31, 20X3, and 20X2. This reporting unit is part of the Technology segment.
350-20-55-25
The flowchart in this Example illustrates the optional qualitative assessment and the quantitative goodwill impairment test described in paragraphs .
- 1An entity has the unconditional option to skip the qualitative assessment and proceed directly to calculating the fair value of the reporting unit and comparing that value with its carrying amount, including goodwill.
Accounting Alternatives
Implementation Guidance
350-20-55-26
The following flowchart provides an overview of the accounting alternative for amortizing goodwill for entities within the scope of paragraph 350-20-15-4.
Qualitative Assessment Evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount (see note 1). Is it more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount? Calculate the fair value of the entity (or the reporting unit) and compare with its carrying amount, including goodwill. Is the fair value of the entity (or the reporting unit) less than its carrying amount? Recognize impairment equal to the difference between the carrying amount of the entity (or the reporting unit) and its fair value, not to exceed the carrying amount of goodwill. Yes Triggering Event Has an event occurred or circumstances changed that would indicate that the fair value of the entity (or the reporting unit) may be below its carrying amount? Yes No Yes No No Stop
- An entity has the unconditional option to skip the qualitative assessment and proceed directly to calculating the fair value of the entity (or the reporting unit) and comparing that value with its carrying amount, including goodwill.
Illustrations
350-20-55-27
This Example illustrates the effect of the accounting alternative for a goodwill impairment triggering event evaluation on the impairment conclusion for an entity within the scope of paragraph 350-20-15-4A. This Example is not indicative of every outcome that may occur because facts and circumstances surrounding triggering events are unique to each entity.
350-20-55-28
Entity A adopted the accounting alternative for a goodwill impairment triggering event evaluation and performs a goodwill impairment triggering event evaluation only as of the end of each reporting period. Entity A also adopted the accounting alternative for amortizing goodwill in accordance with paragraph 350-20-05-5 and elected to perform an impairment test for goodwill at the entity level upon the occurrence of a triggering event only. During the second quarter, Entity A lost a significant customer. However, Entity A was able to replace that customer late in the third quarter of the same year, and the entity's operations returned to previously forecasted levels by the annual reporting date.
350-20-55-29
If Entity A reports only annually, then it would evaluate the facts and circumstances as of the annual reporting date and may conclude that no triggering event exists; therefore, no further goodwill impairment testing would be necessary. Alternatively, if Entity A reports on both a quarterly basis and an annual basis, then it would evaluate the facts and circumstances as of the end of each quarter and may conclude that the loss of the significant customer represents a goodwill impairment triggering event requiring additional impairment testing as of the end of the second quarter.
350-20-65Transition and Open Effective Date Information
Source downloaded: .Record version 9112ab635d33. Effective date must be checked in the source.
350-20-65-1
Paragraph superseded on 06/17/2013 after the end of the transition period stated in Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.
Transition Related to Accounting Standards Updates No. 2014-02, <em class="ph i">Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill,</em> No. 2019-06, <em class="ph i">Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities</em>, and No. 2021-03, <em class="ph i">Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events</em>
350-20-65-2
The following represents the transition information related to Accounting Standards Updates No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, No. 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, and No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events referenced in paragraph 350-20-15-3A:
- aUpon adoption of the guidance for the accounting alternative for amortizing goodwill in the Accounting Alternatives Subsections of this Subtopic and the guidance in paragraph 323-10-35-13, that guidance shall be effective prospectively for new goodwill recognized after the adoption of that guidance. For existing goodwill, that guidance shall be effective as of the beginning of the first fiscal year in which the accounting alternative is adopted.
- bGoodwill existing as of the beginning of the period of adoption shall be amortized prospectively on a straight-line basis over 10 years, or less than 10 years if an entity demonstrates that another useful life is more appropriate.
- c
- dUpon adoption of the accounting alternative for amortizing goodwill, an entity shall make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.
- eA private company or not-for-profit entity that makes an accounting policy election to apply the accounting alternative for amortizing goodwill in the Accounting Alternatives Subsections of this Subtopic for the first time need not justify that the use of the accounting alternative is preferable as described in paragraph 250-10-45-2.
350-20-65-3
Paragraph superseded on 06/21/2024 after the end of the transition period stated in Accounting Standards Updates No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.
Transition Related to Accounting Standards Update No. 2021-03, <em class="ph i">Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events</em>
350-20-65-4
The following represents the transition and effective date information related to Accounting Standards Update No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events:
- aThe pending content that links to this paragraph shall be effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. A private company or not-for-profit entity that adopts the pending content that links to this paragraph shall apply it as of the beginning of the interim or annual period for financial statements that have not yet been issued or made available for issuance in the year of adoption. A private company or not-for-profit entity shall not retroactively adopt the pending content that links to this paragraph as of the beginning of an annual period for which interim-period financial statements have already been issued in the year of adoption.
- bFor a private company or not-for-profit entity that adopts the pending content that links to this paragraph after its original effective date, that pending content shall be applied prospectively as of the beginning of the first reporting period in which the accounting alternative is adopted.
- cA private company or not-for-profit entity that makes an accounting policy election to apply the pending content that links to this paragraph for the first time need not justify that the use of the accounting alternative is preferable as described in paragraph 250-10-45-2.
Related subtopics
- 350-10 OverallIntangibles—Goodwill and Other
- 350-30 General Intangibles Other Than GoodwillIntangibles—Goodwill and Other
- 740-805 Business CombinationsIncome Taxes
- 805-20 Identifiable Assets and Liabilities, and Any Noncontrolling InterestBusiness Combinations
- 825-10 OverallFinancial Instruments
- 805-50 Related IssuesBusiness Combinations