After initial recognition of goodwill and indefinite intangible assets through a business combination or other acquisition, these assets must be periodically tested for impairment under ASC 350. These impairment tests are the result of ASC 805 which prohibited pooling of interest and eliminated goodwill amortization.
Under U.S. GAAP, goodwill impairment testing is a two step process conducted at the reporting unit level. The first step is to identify potential impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying value there is no goodwill impairment and step two is not performed. If there is goodwill impairment, step two is performed where the implied fair value of goodwill is compared to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized for the difference.
Hypothetical scenario that requires an expert in business valuation:
A business owner previously acquired a business that included part of the purchase price being allocated to goodwill. A year has passed and the business owner needs to test this goodwill for impairment to satisfy his auditors. The business owner should hire an independent valuation expert to assess if there is any goodwill impairment, and if there is, to assess the amount of the impairment.
Special considerations for purchase price allocation valuations:
When conducting a goodwill impairment test, the fair value of the reporting unit is first determined. The Fair Value premise of value is used as specified under ASC 350. Previously, information regarding goodwill impairment could be found under Financial Accounting Standard 142.
