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FASB’s Exposure Draft on Goodwill Impairment Misses the Mark

by Brian Bornino

On April 22, 2011, the FASB issued an Exposure Draft to ASC 350, Intangibles – Goodwill and Other that would alter the process by which companies would conduct goodwill impairment testing.

The highlight of the Exposure Draft is that instead of a company having to follow the two-step process that was originally outlined in SFAS 142, an initial step would be performed in which a company can qualitatively determine whether it is more likely than not that impairment exists, taking into account factors such as market conditions, company performance, industry factors, etc.  If management determines that there is 50%+ likelihood that goodwill is not impaired, then the company would not need to perform any impairment analysis in accordance with the two-step process above.

In my opinion, this Exposure Draft misses the mark for several reasons:

  1. Most companies are already doing this.  How often have you seen in-depth fair value calculations and analyses when a company is not even close to impairment?  We rarely (if ever) see this.
  2. I believe that impairment charges should be much more common.  Many auditors have signed off on less-than-adequate company-prepared valuations that seek to avoid impairment charges, resulting in an industry-wide overstatement of goodwill.  Unfortunately, this problem will become even worse with the new rules, as the FASB has provided management with one more way to avoid impairment charges.
  3. This is a step backwards.  While I understand that some financial statement users do not focus on intangible assets, I know that some do…such as me!  I am always interested to see which intangible assets are recorded in a transaction, and when management determines that those intangible assets are impaired.  As someone who analyzes financial statements for a living, I can say with certainty that fair value accounting provides more relevant financial information than historical cost accounting…particularly with respect to intangible assets.

I suspect that this Exposure Draft will be adopted after the comment period ends on June 6, and that nearly every company will adopt early to simplify their impairment testing processes.  I am hopeful that the quality and integrity of company financial statements is maintained, although I am fearful that the FASB’s new rules will result in a goodwill impairment testing process that is…well,…impaired.

 

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4 thoughts on “FASB’s Exposure Draft on Goodwill Impairment Misses the Mark

  1. Tony Alfonso

    While I can understand the reasons that public companies are asking for this. I am not a fan of companies / auditors making any valuation judgments. This can be exasperated if the private company is a multiple reporting unit entity.

    Even when companies try to do a valuation themselves, most auditors and private companies do not understand valuation and view it as a mere spreadsheet exercise. They lack an in-depth understanding in the assumptions used. Most do not even know how to match a discount rate (assuming it is correct) to the appropriate cash flow.

    This is bad news, the industry is going backwards having two different standards, one for private and one for public.

    Reply
    1. bbornino Post author

      Thanks for your response, Tony. I wholeheartedly agree with you that “private company GAAP” is a slippery slope and an inappropriate step backwards, and I suspect that the threshold to pass the “more likely than not” impairment testing standard will be very low (i.e., if the company stayed in business and posted positive profit, it must not be impaired)!

      Reply
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