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New Goodwill Impairment Testing Rules Met with Skepticism

June 8th, 2011 by Brian Bornino

A quick review of the 63 comment letters related to the FASB’s Exposure Draft regarding new rules for goodwill impairment testing suggests that the impact of this new rule is unclear.  While the responses from companies were (predictably) overwhelmingly positive, the responses from industry-leading CPA firms were skeptical, and were largely in-line with our thoughts outlined in our recent blog comments and article.   A few excerpts from comment letters that I really liked:

  • PWC -“…  Fair value measurement, however, is inherently quantitative…It may be difficult for a qualitative assessment alone to support a conclusion that no further evaluation is necessary when a reporting unit does not have a recent fair value calculation that exceeded its carrying amount by a substantial margin.  Without such support, we believe that the proposed update will create operational challenges for both preparers and auditors when evaluating management’s assertions.  Such operational challenges may limit cost savings intended by the proposed update and may result in unanticipated costs to preparers due to potentially higher scrutiny and ”second guessing” by regulators.”
  • KPMG – “Further, it is unclear in the proposed ASU as to how the Board expects that an entity would apply the more-likely-than-not test.  For example, forming a conclusion based on a more-likely-than-not threshold would appear to require an entity to consider a variety of scenarios, estimates of fair values under those scenarios, and potentially probabilities related to those scenarios.  To reach a conclusion that it is not more-likely-than-not that the fair value of a reporting unit is below its carrying amount, it would seem that the entity would need to make some estimation of the fair value of the reporting unit.  Even if that estimate is only a rough approximation, it would seem that the entity would need to conduct some quantitative analysis of factors (e.g., analysis of the impact of industry, economy, and entity growth, operations, trends, etc.) impacting the fair value of a reporting unit.”
  • Deloitte – “Further, auditors would need to obtain sufficient appropriate audit evidence to determine whether the entity has a supported and reasonable basis for its conclusion about whether the fair value of the reporting unit is not more likely than not less than its carrying amount.  Valuation specialists may still participate in audit procedures to evaluate the impact of adverse factors on the assumptions that are significant to the determination of fair value. Because of the subjectivity of the qualitative assessment, this evaluation may be more intensive than the current analysis of the quantitative fair value determination in step 1, thereby increasing preparers’ audit costs”
  • Grant Thornton – “We are concerned that the guidance in the proposed ASU would be difficult to apply in practice and that the cost savings, if any, would be offset by the additional efforts required by prepares and their auditors to implement the guidance”
  • BDO – “we support the Board’s objective to reduce the complexity and cost of the current impairment model.  However, we are concerned that the Proposal will not ultimately achieve those objectives.  We believe introducing a “more likely than not” qualitative assessment will lead to differences of opinion between preparers, auditors and regulators, particularly since the Proposal lacks an example of the analysis that would be persuasive to all parties.  Those disagreements would be most prevalent when the weight of positive and negative factors under consideration seemingly offset. Since it is possible some conclusions may attach too much weight to positive evidence, the Proposal may also delay the timely recognition of impairment charges, which users consider when evaluating the success of prior business combinations.”

I am not surprised that the industry’s leading CPA firms identified these issues, and I continue to be skeptical that these rules will have any positive impact on companies or the accounting industry.

One thought on “New Goodwill Impairment Testing Rules Met with Skepticism

  1. Sam

    I take the comments listed above with a grain of salt. It looks like they are fighting a drain on billable hours with the simplification, rather than what is best for the financials.


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