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Notes from my first “Step Zero” goodwill impairment test

by Brian Bornino

I was consulting with a valuation colleague from another firm who presented me with my first opportunity to review a company-prepared memo in which a company applied the FASB’s new “Step Zero” process to qualitatively determine whether goodwill impairment exists.  The highlights (or lowlights, as they may be) of the company’s memo are presented below:

  1. The company reported positive EBITDA for the 3rd consecutive year

    My comment:  since when is this a criterion for not having impairment?  If a company posted $10 million of profit for 10 years in a row, then posted $1 of profit for the next three years, are we saying that there would not be impairment because $1 is a positive number?

  2. The outlook for the company and its industry is positive

    My comment:  there was no data presented to support this assertion, and even if there was, this is not adequate documentation to support that goodwill is not impaired. 

  3. The company has not incurred a goodwill impairment charge in the past

    My comment:  again, this is not relevant to whether there is goodwill impairment today, and if the FASB’s new rule remains in place and auditors accept memos like this one, it is not likely that the company will ever incur an impairment charge.

Clearly, if this is the type of support auditors will rely upon to support companies’ goodwill values (i.e., with no discussion of valuation, carrying values, comparable companies, discounted cash flows, etc.), then the integrity of the entire goodwill impairment testing process has been comprised by the FASB’s new rule.

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