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Generally, the acquirer in a business combination is willing to pay more for a business than the sum of the fair values of the individual assets and liabilities because of other inherent value associated with an assembled business. In addition, synergies and other benefits that are expected from combining the activities of the acquirer and acquiree are often drivers for paying an amount greater than the fair value of the underlying assets and liabilities. The resulting excess of the aggregate of (1) the consideration transferred, as measured in accordance with ASC 805-30-30-7, which generally requires the use of acquisition-date fair value; (2) the fair value of any noncontrolling interest in the acquiree; and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, as measured in accordance with ASC 805, is recognized as goodwill. This chapter addresses the accounting for goodwill after an acquisition.
Under ASC 350-20, goodwill is not amortized. Rather, an entity’s goodwill is subject to periodic impairment testing. ASC 350-20 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
An entity is permitted to first assess qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the quantitative goodwill impairment test. This would not preclude the entity from performing the qualitative assessment in any subsequent period.
When an entity bypasses the qualitative assessment or determines based on the qualitative assessment that further testing is necessary, a quantitative goodwill impairment test is performed to identify potential impairment and measure an impairment loss, if any.
To perform step one of the quantitative goodwill impairment test, an entity must:
  • Identify its reporting units
  • Assign assets and liabilities to its reporting units
  • Assign all goodwill to one or more of its reporting units
  • Determine the fair value of those reporting units to which goodwill has been assigned

Prior to the adoption of ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (discussed below), if a reporting unit fails step one (i.e., the reporting unit’s carrying amount exceeds its fair value), step two requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities, using the acquisition method accounting guidance in ASC 805 to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any.
New guidance
In January 2014, the FASB and the Private Company Council (PCC) issued ASU 2014-02, Accounting for Goodwill (the “goodwill alternative”). In May 2019, the FASB issued ASU 2019-06, Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, which extended the goodwill alternative to NFP entities. Under the goodwill alternative, a private company/NFP entity is able to amortize goodwill on a straight-line basis over a period of ten years or over a shorter period if the company demonstrates that another useful life is more appropriate. Goodwill is only subject to impairment testing upon the occurrence of a triggering event. Whether to test goodwill at the entity-wide or reporting unit level is a policy election that is required to be made on the date the goodwill alternative is adopted. See BCG 9.11 for more information on the goodwill alternative. All other sections of this chapter address the accounting for goodwill by entities not applying this alternative.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The revised guidance eliminates step two of the goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.
The revised guidance is effective for public business entities that are SEC filers, excluding entities eligible to be smaller reporting companies as defined by the SEC, for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. An entity that adopts ASU 2017-04 must apply the revised impairment model for all goodwill impairment tests within that fiscal year. For example, a calendar year-end public business entity that is an SEC filer must apply the revised guidance effective January 1, 2020 even if the company’s annual goodwill impairment testing date is not until later in the calendar year (e.g., October 1). All other entities that have not elected the goodwill alternative will be required to apply the guidance in fiscal years beginning after December 15, 2022. Early adoption is permitted. Early adoption in a fiscal year is precluded if an impairment test earlier in that fiscal year applied the former impairment guidance.
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