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When a reporting unit is to be disposed of in its entirety, the entity must include in the reporting unit’s carrying amount the goodwill of that reporting unit in determining the gain or loss on disposal. When some, but not all, of a reporting unit is to be disposed of, the accounting for that reporting unit’s goodwill will depend on whether the net assets that are to be disposed of constitute a business. If the net assets that are to be disposed of do not constitute a business, no goodwill should be attributed to those net assets. If, on the other hand, the net assets that are to be disposed of do constitute a business, the entity should attribute a portion of the reporting unit’s goodwill to that business in determining the gain or loss on the disposal of the business. In accordance with ASC 350-20-40-3, the amount of goodwill that is attributed to the business should be based on the relative fair values of (1) that business and (2) the portion of the reporting unit that will be retained.
If, however, the business that is to be disposed of was never integrated into the reporting unit after its acquisition and thus the rest of the reporting unit never realized the benefits of the acquired goodwill, the relative fair value allocation approach is not used. This situation might occur when the acquired business is operated as a standalone entity or when the business is to be disposed of shortly after it is acquired. In that case, goodwill associated with the nonintegrated business would not be included in a relative fair value calculation. Instead, the original goodwill amount associated with that business should be included when determining the gain or loss on disposal. However, these situations occur infrequently because some amount of integration generally occurs after an acquisition. The determination of whether the business to be disposed of has never been integrated largely depends on the specific facts and circumstances and requires significant judgment. The following factors are helpful when determining whether some level of integration has occurred:
•  Level of management interaction between the acquired business and its parent
•  Length of time between the acquisition date and the subsequent disposal
•  Level of shared customers, shared customer lists, customer referrals, etc. amongst the acquired business and the parent
•  Extent of any corporate level services provided to the acquired business by the parent
•  Joint marketing efforts between the acquired business and the parent or other businesses owned by the parent
•  Use of common brands and trademarks
•  Expected integration plans and synergies underlying the original acquisition
•  Legal ownership structure
•  Geographic proximity (potentially indicating shared services and market operations)
When only a portion of a reporting unit’s goodwill is attributed to a business that is to be disposed of, the goodwill remaining in the portion of the reporting unit that is to be retained should be tested for impairment in accordance with ASC 350-20-40-7. See BCG 9.4.4 for further information.

9.10.1 Impairment testing: disposal of a business

The disposal timeline can usually be divided into three discrete accounting events that require consideration: (1) a current expectation of an impending disposal, (2) classification of the disposal group as held for sale under ASC 360-10, and (3) the actual disposal. See PPE 5.3 for further information on classification of the disposal group as held for sale under ASC 360-10. These three events may occur in the same accounting period and, therefore, require no separate accounting consideration. Usually, however, the events transpire over two or more accounting periods. Therefore, because each event may result in an impairment test or other consequences for the carrying amount of goodwill, the accounting associated with a disposition may involve more than simply recording a gain or loss upon sale.
In cases in which management is planning to sell a business before the end of the estimated useful lives of the underlying long-lived assets, management would need to consider whether to revise the remaining estimated useful lives of the assets, if the entity determines the business does not yet meet the held for sale criteria. See PPE 4.2.3 for further information.
When there is a planned sale of a business, a company should consider the relevant guidance in determining the carrying amount of the business for purposes of evaluating the business and/or the underlying assets for impairment.

9.10.2 Expectation of a disposal (goodwill)

An entity should test all of a reporting unit’s goodwill for impairment if (1) the entity has a “more likely than not” expectation that the reporting unit or a significant portion of the reporting unit will be sold or otherwise disposed of, and (2) based on that expectation, it is “more likely than not” that the fair value of the reporting unit is below its carrying amount. Any impairment charge resulting from this impairment test would be recognized as part of an impairment loss.

9.10.3 Assets held for sale (goodwill)

A disposal group that is classified as held for sale should be measured at the lower of its carrying amount or fair value less cost to sell each reporting period following the guidance in ASC 360-10-35-43. The carrying amount of any assets that are not covered by ASC 360-10, including goodwill, that are included in a disposal group classified as held for sale should be adjusted in accordance with other applicable US GAAP prior to measuring the fair value less cost to sell of the disposal group.

9.10.4 Disposal of the business (goodwill)

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:
Carrying Amount
Goodwill
$1,000
Other net assets:
US electronics business
2,300
European electronics business
1,700
Total
$5,000
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:
US
Europe
Total
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.
Step two:
Total
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
Attributed goodwill
400
Impairment loss
$(100)
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.

9.10.5 Attribution of goodwill in a spin-off (goodwill)

When a reporting unit or a portion of a reporting unit that constitutes a business is to be spun off to shareholders, goodwill associated with the disposal group should be attributed to and included in the distributed carrying value at the distribution date. In determining the goodwill to be attributed to the spin-off transaction, the parent would usually follow the relative fair value approach (assuming the parent is spinning off a portion of the reporting unit), and the goodwill attributed to the spin-off entity would be removed from the parent’s balance sheet at the time of the spin-off. Until the time of the spin-off, the disposal group should be tested for impairment on a held and used basis. In addition to any impairment losses required to be recognized while the asset is classified as held and used, an impairment loss, if any, should be recognized when the asset is disposed of if the carrying amount of the asset (disposal group) exceeds its fair value in accordance with ASC 360-10-40-4.
Goodwill recorded in the spin-off entity’s financial statements is not necessarily the same amount as what the parent would eliminate from its balance sheet at the time of the spin-off (i.e., the accounting may not be symmetrical because the method of attributing goodwill to be removed from the parent’s balance sheet may differ from the method used to measure the value of goodwill received by the spin-off entity). While the parent’s accounting is based on the relative fair value of the reporting unit, the standalone or carve-out statements prepared for the spin-off entity follow a historical goodwill concept and reflect the acquisition-specific goodwill of any previously acquired entities that will be part of the spin-off. Such goodwill includes any goodwill residing at the parent level that had not previously been pushed down to any subsidiaries that are included in the spin-off entity. Furthermore, any prior impairments of goodwill at the parent level may not necessarily be reflected in the carve-out financial statements. Goodwill recorded at the spin-off entity level would be attributed to the spin-off entity’s reporting units and may be separately tested for impairment for all prior periods, similar to subsidiary goodwill impairment testing as discussed in BCG 9.9.4.3. In such a case, impairment testing at the spin-off entity level may produce goodwill impairment charges that have not been required to be recorded at the parent level.

9.10.6 Attribution of goodwill in a nonmonetary exchange transaction

In accordance with ASC 845-10-15-4, business combinations are not within the scope of the nonmonetary transactions guidance and should follow the accounting under ASC 805. Therefore, if a company engages in a transaction that involves the exchange of a business for any nonmonetary assets (including an equity-method investment), such transaction must follow the acquisition method and the acquirer would measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition date fair values (ASC 805-20-30-1). We believe that when a portion of a reporting unit that constitutes a business is to be disposed of in a nonmonetary exchange transaction that will be accounted for at fair value, a portion of the reporting unit’s goodwill should be attributed to the business in the same manner as discussed in BCG 9.10.4 for a disposal by sale.
Question BCG 9-30 addresses the goodwill attribution for a nonmonetary exchange transaction.
Question BCG 9-30
Should goodwill be attributed to a disposal group that is a business and part of a reporting unit in determining a gain or loss upon disposal when the disposal group is contributed to a joint venture?
PwC response
ASC 350-20-40-2 states, “when a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal.” The contribution of a business to a joint venture is analogous to other disposals (e.g., a sale or spin-off). The guidance in ASC 810-10-40-3A through ASC 810-10-40-5 should be followed when a subsidiary that is a business is transferred to an equity-method investee or a joint venture. Therefore, a gain or loss would be realized based on the difference between the fair value of the equity investment in the joint venture received and the carrying amount of the business contributed, which includes an attribution of goodwill.
Following the attribution of goodwill to the disposed business, ASC 350-20-40-7 requires that any goodwill that remains in the reporting unit be tested for impairment.

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