A gain or loss that results from the disposal of a business should be recognized at the date of sale. In most cases, such a gain or loss may not be significant when impairment losses have been recognized at the time the disposal group meets the held for sale criteria (or upon the expectation to sell) and is subsequently adjusted to its fair value less cost to sell prior to the disposition. At the time of sale, assets, including any goodwill, and liabilities included in the carrying amount of the disposal group will be factored into the determination of gain or loss on the disposal of a business.
Example BCG 9-29 demonstrates the goodwill accounting considerations when disposing of a business that is a portion of a reporting unit.
EXAMPLE BCG 9-29
Disposal of a business that is a portion of a reporting unit
Company A is a calendar year-end diversified manufacturing company that has an electronics reporting unit. The electronics reporting unit includes two geographically based businesses, one in the United States and the other in Europe, both of which were originally acquired in purchase transactions. Although its US electronics business is profitable and expected to remain stable, Company A’s electronics business in Europe has only managed to break even, and is in decline due to high levels of competition. Company A’s annual goodwill impairment testing in November 20X1 indicated that the $1,100 carrying amount of the electronics reporting unit’s goodwill was not impaired because the unit’s fair value of $5,500 exceeded the unit’s carrying amount of $5,100. For simplicity, all tax effects have been ignored, and assume that there is no change in other net assets throughout the example. It has also been assumed that there are no direct costs to sell the European electronics business.
What are Company A’s goodwill accounting considerations given the decline in the European electronics operations?
Analysis
“More likely than not” expectation that European electronics business will be sold
In May 20X2, the European electronics business loses one of its significant customers. Based on this event, while Company A’s management has not yet committed to a plan to sell the European electronics business, it determines that it is more likely than not that it will sell the European electronics business within the next year and that the fair value of the electronics reporting unit may no longer exceed the unit’s carrying amount. Therefore, Company A tests the entire electronics reporting unit’s goodwill for impairment during May 20X2. Prior to testing the electronics reporting unit’s goodwill for impairment, Company A determines that the carrying amounts of the unit’s other assets do not require adjustment under other applicable GAAP (e.g.,
ASC 350 and
ASC 360-10) including testing the European electronics business under the held-and-used model. The electronics reporting unit fails step one of the goodwill impairment test because the fair value of the reporting unit has declined, and step two results in a $100 goodwill impairment loss. After the entity recognizes the goodwill impairment loss, the carrying amount of the electronics reporting unit is as follows:
|
US electronics business |
|
|
2,300 |
|
European electronics business |
| 1,700 |
View table
European electronics business is held for sale
In September 20X2, Company A’s management commits to a plan to sell the European electronics business. That plan meets all of
ASC 360-10’s criteria for the European electronics business to be (1) classified as held for sale (i.e., a disposal group), and (2) reported as a discontinued operation pursuant to
ASC 205-20. At this point, Company A would assign the electronics reporting unit’s goodwill to the US and European electronics businesses based on the relative fair values of those businesses. Company A determines this goodwill attribution as follows:
Fair values |
$3,000 |
|
$2,000 |
|
$5,000 |
Relative fair value |
60% |
|
40% |
|
100% |
Goodwill |
$600 |
|
$400 |
|
$1,000 |
View table
Company A would measure the European electronics business at the lower of its carrying amount or fair value less cost to sell pursuant to
ASC 360-10. In doing so, however, Company A would first adjust the carrying amount of the goodwill that was assigned to the European electronics business by applying
ASC 350-20’s goodwill impairment test. After Company A assigns goodwill to the European electronics business, the business’ (a reporting unit) carrying amount of $2,100 (goodwill of $400 and other net assets of $1,700) exceeds the business’ fair value of $2,000. The European electronics business fails step one of the goodwill impairment test.
Fair value of European’s electronics business |
$2,000 |
Fair value of European’s net assets, excluding goodwill |
(1,700) |
Implied fair value of goodwill |
300 |
View table
In its third quarter financial statements, Company A would recognize the loss of $100. There would be no further loss recognized for classifying the European electronics business as held for sale because the carrying amount would be equal to the disposal group’s fair value less cost to sell.
Company A would also need to test the goodwill of $600 that was assigned to the US electronics business (i.e., the portion of the electronics reporting unit that is to be retained) for impairment. That goodwill would not be impaired because the US electronics business’ fair value of $3,000 exceeds its carrying amount of $2,900 (goodwill of $600 and other net assets of $2,300).
European electronics business is sold
In December 20X2, Company A sells the European electronics business for $1,800. The sales price is below Company A’s previous estimates of the European electronics business’ fair value because the business lost another major customer in November 20X2. In its fourth quarter financial statements, Company A would recognize an additional $200 loss (sales proceeds of $1,800 minus a carrying amount of $2,000) on the disposal of discontinued operations. The total loss on the disposal of the discontinued business would be $300 ($100 recognized in the third quarter plus $200 in the fourth quarter) representing accumulated losses, since it was determined that the discontinued operation met the held for sale criteria. The goodwill impairment loss of $100 recognized in May of 20X2 on the electronics reporting unit would not be included in the loss on disposal but would be shown as an impairment prior to disposal.
Company A does not believe that the additional loss is an indicator of the value of the goodwill assigned to the US electronics business and, therefore, it does not represent a triggering event for an interim impairment test of the goodwill included in the US electronics business. However, if Company A had an annual impairment test date of December 31, it would still have to perform the impairment test for the remaining US electronics business at that time.