# ASC 350-20-55: Intangibles—Goodwill and Other — Goodwill — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 350-20-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/350/20/#55-implementation-guidance-and-illustrations)

SEC content: no

#### Implementation Guidance

##### [350-20-55-1](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-1)

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Determining whether a component of an [operating segment](https://asc.understandingaccounting.org/glossary/o/#operating-segment "A component of a public entity. See Section 280-10-50 for additional guidance on the definition of an operating segment.") is a [reporting unit](https://asc.understandingaccounting.org/glossary/r/#reporting-unit "The level of reporting at which goodwill is tested for impairment. A reporting unit is an operating segment or one level below an operating segment (also known as a component).") is a matter of judgment based on an entity's individual facts and circumstances. Although paragraphs

[350-20-35-33 through 35-35](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-33)

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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-2)

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The characteristics identified in paragraphs

[350-20-35-33 through 35-35](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-33)

that must be present for a component to be a reporting unit are discussed in the following implementation guidance.

##### [350-20-55-3](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-3)

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The determination of whether a component constitutes a [business](https://asc.understandingaccounting.org/glossary/b/#business "Paragraphs 805-10-55-3A805-10-55-4805-10-55-5805-10-55-6 and 805-10-55-8805-10-55-9 define what is considered a business.") or a [nonprofit activity](https://asc.understandingaccounting.org/glossary/n/#nonprofit-activity "An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an entity's purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity.") 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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-4)

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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](https://asc.understandingaccounting.org/asc/280/10/#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](https://asc.understandingaccounting.org/glossary/g/#goodwill "An asset representing the future economic benefits arising from other assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are not individually identified and separately recognized. For ease of reference, this term also includes the immediate charge recognized by not-for-profit entities in accordance with paragraph 958-805-25-29.") 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

[350-20-35-39 through 35-40](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-39)

).

##### [350-20-55-5](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-5)

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Segment management, as defined in paragraphs

[280-10-50-7 through 50-8](https://asc.understandingaccounting.org/asc/280/10/#280-10-50-7)

, 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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-6)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-7)

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In determining whether the components of an operating segment have similar economic characteristics, all of the factors in paragraph [280-10-50-11](https://asc.understandingaccounting.org/asc/280/10/#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:

1.  a
    
    The manner in which an entity operates its business or nonprofit activity and the nature of those operations
    
2.  b
    
    Whether 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)
    
3.  c
    
    The extent to which the component businesses (or nonprofit activities) share assets and other resources, as might be evidenced by extensive transfer pricing mechanisms
    
4.  d
    
    Whether the components support and benefit from common research and development projects.
    

The fact that a component extensively shares assets and other resources with other components of the operating segment may be an indication that the component either is not a business or nonprofit activity or it may be economically similar to those other components.

##### [350-20-55-8](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-8)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-9)

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If two operating segments have been aggregated into a reportable segment by applying the aggregation criteria in paragraph [280-10-50-11](https://asc.understandingaccounting.org/asc/280/10/#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:

1.  a
    
    The determination of reporting units under this Subtopic begins with the definition of an operating segment in paragraph [280-10-50-1](https://asc.understandingaccounting.org/asc/280/10/#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.
    
2.  b
    
    The 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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-10)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-11)

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Entity A is performing a goodwill impairment test relative to Reporting Unit at December 31, 20X2. Reporting Unit has the following assets and liabilities:

1.  a
    
    Net assets (excluding goodwill and deferred income taxes) of $60 with a tax basis of $35
    
2.  b
    
    Goodwill of $40
    
3.  c
    
    Net deferred tax liabilities of $10.

##### [350-20-55-12](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-12)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-13)

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In the quantitative impairment test in paragraphs

[350-20-35-4 through 35-8](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-4)

, 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.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-2A9B4923-FB4E-4546-A8AB-942826EA7319-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-14)

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In the quantitative impairment test, Entity A would determine the carrying amount of Reporting Unit as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-835839B5-A6E7-4644-B7F4-835E34D58E28-low.gif)
    
    Net assets $60 Goodwill 40 Deferred taxes (10) Carrying value $90

##### [350-20-55-15](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-15)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-16)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-17)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-18)

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Entity A is performing a goodwill impairment test relative to Reporting Unit at December 31, 20X2. Reporting Unit has the following assets and liabilities:

1.  a
    
    Net assets (excluding goodwill and deferred income taxes) of $60 with a tax basis of $35
    
2.  b
    
    Goodwill of $40
    
3.  c
    
    Net deferred tax liabilities of $10.

##### [350-20-55-19](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-19)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-20)

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In the quantitative impairment test in paragraphs

[350-20-35-4 through 35-8](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-4)

, 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.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-0244B189-CC70-47C7-9C71-A7B152108C72-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-21)

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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.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-43D060F0-72F7-46D8-97B4-802DB2A38B06-low.gif)
    
    Net assets $60 Goodwill 40 Deferred income taxes (10) Carrying value $90

##### [350-20-55-22](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-22)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-23)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-23A)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-23B)

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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.
    
-   ![](https://asc.understandingaccounting.org/asc-img/GUID-1143ECB6-B929-42D5-A461-2F8E6032F70E-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-23C)

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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

[805-740-55-9 through 55-13](https://asc.understandingaccounting.org/asc/740/805/#740-805-55-9)

to Reporting Unit X, as follows.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-CF45D93B-54C3-431C-83AD-EDA6DA98604A-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-23D)

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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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-24)

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In accordance with paragraphs

[350-20-50-1 through 50-2](https://asc.understandingaccounting.org/asc/350/20/#350-20-50-1)

, 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.
    
    -   ![](https://asc.understandingaccounting.org/asc-img/GUID-B5D5D4CE-AE02-4955-8FC0-BA0A0CE06333-low.gif)
        
        ($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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-25)

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The flowchart in this Example illustrates the optional qualitative assessment and the quantitative goodwill impairment test described in paragraphs

[350-20-35-3A through 35-13](https://asc.understandingaccounting.org/asc/350/20/#350-20-35-3A)

.

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-2E0DCF05-F286-4297-A5AF-BAADC5E754EB-low.gif)
    

Note:

1.  1
    
    An 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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-26)

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The following flowchart provides an overview of the accounting alternative for amortizing goodwill for entities within the scope of paragraph [350-20-15-4](https://asc.understandingaccounting.org/asc/350/20/#350-20-15-4).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-273DDE41-8A87-4EEB-9B47-C0D43D5CB760-low.gif)
    
    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
    

Note 1:

-   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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-27)

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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](https://asc.understandingaccounting.org/asc/350/20/#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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-28)

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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](https://asc.understandingaccounting.org/asc/350/20/#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](https://asc.understandingaccounting.org/asc/350/20/#350-20-55-29)

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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.