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In assessing goodwill for impairment, an entity may first assess qualitative factors (step zero) to determine whether it is necessary to perform a quantitative goodwill impairment test (see BCG 9.6).
Prior to the adoption of ASU 2017-04, if an entity bypasses the qualitative assessment or determines based on its qualitative assessment that further testing is required, the two-step goodwill impairment test should be followed. Step one of the goodwill impairment test entails identifying a potential impairment of goodwill (see BCG 9.8.1), while step two entails measuring the amount of impairment, if any (see BCG 9.8.2).
Figure BCG 9-3 illustrates the goodwill impairment model prior to the adoption of ASU 2017-04.
Figure BCG 9-3
Goodwill impairment model prior to the adoption of ASU 2017-04
In January 2017, the FASB issued ASU 2017-04. In the revised guidance, the optional qualitative assessment (step zero) and the first step of the quantitative assessment (step one) remain unchanged. Step two is eliminated. As a result, step one will be used to determine both the existence and amount of goodwill impairment.
Figure BCG 9-4 illustrates the revised impairment model.
Figure BCG 9-4
Revised goodwill impairment model

9.5.1 Timing considerations for goodwill impairment testing

An entity is required to test the carrying amount of a reporting unit’s goodwill for impairment on an annual basis in accordance with ASC 350-20-35-28. In accordance with ASC 350-20-35-30, an entity should also test goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Prior to the adoption of ASU 2017-04, if the carrying amount of a reporting unit is zero or negative, goodwill of the reporting unit should be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is “more likely than not” that a goodwill impairment exists. ASC 350-20-35-3A defines “more likely than not” as “a likelihood of more than 50%.”
See BCG 9.8.1.3 for the accounting for reporting units with zero or negative carrying amounts subsequent to the adoption of ASU 2017-04.

9.5.1.1 Triggering events for goodwill impairment testing

If an event occurs or circumstances change between annual tests that could more likely than not reduce the fair value of a reporting unit below its carrying amount (triggering events), the goodwill of that reporting unit should be tested for impairment using the process described in BCG 9.8. The factors considered in a qualitative assessment of goodwill (outlined in BCG 9.6) are also examples of interim triggering events that should be considered in determining whether goodwill should be tested for impairment during interim periods. Such factors include changes in macroeconomic conditions, cost increases, and share price, among others.
In accordance with ASC 350-20-40-7, the goodwill of a reporting unit must also be tested for impairment if a portion of the reporting unit’s goodwill has been included in the carrying amount of a business to be disposed of. See BCG 9.10 for further information. See Question BCG 9-3, Question BCG 9-4, Question BCG 9-5, Question BCG 9-6, Question BCG 9-7, Question BCG 9-8, and Question BCG 9-9 for additional considerations related to goodwill impairment testing.
Question BCG 9-3
Can the original transaction price be used as an indicator of fair value in the first post acquisition goodwill impairment test? What if the next highest bid was substantially lower?
PwC response
When assessing fair value in the first goodwill impairment test after an acquisition, an acquirer may consider the purchase price as one data point, among others, in determining fair value, unless there is contradictory evidence. ASC 820-10-30-3A requires that a reporting entity consider factors specific to the transaction in determining whether the transaction price represents fair value. The fact that the next highest bid was substantially lower than an acquirer’s bid does not necessarily mean that the transaction price is not representative of fair value, but it could indicate that significant acquirer-specific synergies were included in the determination of the purchase price.
Question BCG 9-4
If none of the events and circumstances described in ASC 350-20-35-3C are present, can an entity conclude that it does not have a requirement to perform an interim impairment test for goodwill?
PwC response
No. The indicators listed in ASC 350-20-35-3C are examples, and do not comprise an exhaustive list. ASC 350-20-35-3F indicates that an entity should consider other relevant events and circumstances that affect the fair value or carrying amount of a reporting unit.
Additional examples of events that may indicate that an interim impairment test is necessary include:
  • Impairments of other assets or the establishment of valuation allowances on deferred tax assets
  • Cash flow or operating losses at the reporting unit level (the greater the significance and duration of losses, the more likely it is that a triggering event has occurred)
  • Negative current events or long-term outlooks for specific industries impacting the company as a whole or specific reporting units
  • Not meeting analyst expectations or internal forecasts in consecutive periods, or downward adjustments to future forecasts
  • Planned or announced plant closures, layoffs, or asset dispositions
  • Market capitalization of the company below its book value
Therefore, only after considering all available evidence, can a company conclude that it does not have a requirement to perform an interim impairment test for goodwill.
Question BCG 9-5
Does the option to perform a qualitative impairment assessment change how an entity would determine whether it needs to perform an event-driven interim test?
PwC response
The option to perform a qualitative impairment assessment does not change when an entity should perform a goodwill impairment test. An interim test should be performed 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. Additionally, if the carrying amount of a reporting unit is zero or negative prior to the adoption of ASU 2017-04, goodwill of that reporting unit should be tested for impairment on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists.
For entities with publicly traded equity or debt securities, although the impairment test for goodwill occurs at the reporting unit level, a significant decline in the market value of such securities may indicate the need for an interim impairment test. It is important to remember that the goodwill test is not based on an “other than temporary” decline. When a substantial decline occurs, an entity should consider whether it is “more likely than not” that the fair value of any of the entity’s reporting units has declined below the reporting unit’s carrying amount. In these situations, an entity should examine the underlying reasons for the decline, the significance of the decline, and the length of time the market price has been depressed to determine if a triggering event has occurred. A decline that is severe, even if it is recent, as a result of an event that is expected to continue to affect the company will likely trigger the need for a test. Further, a decline that is of an extended duration will also likely trigger the need for a test. In contrast, a relatively short-term decline in the market price of the company’s stock may not be indicative of an actual decline in the company’s fair value when one considers all available evidence. Interim impairment triggers can also be present at the reporting unit level even when a public company’s market capitalization is equal to or greater than its book value. All available evidence should be considered when determining a reporting unit’s fair value.
Question BCG 9-6
In lieu of performing its goodwill impairment test, can a company, whose market capitalization is significantly below book value, write off its goodwill in its entirety?
PwC response
To recognize a goodwill impairment, the company will need to test each reporting unit to determine the amount of a goodwill impairment loss. If the fair value of a reporting unit is greater than the unit’s carrying amount in step one (or if the implied fair value of goodwill is greater than its recorded amount under the step-two guidance prior to the adoption of ASU 2017-04), a company cannot record a goodwill impairment.
Question BCG 9-7
If a company experiences a decline in market capitalization that is consistent with declines experienced by others within its industry, is it reasonable for the company to assert that a triggering event has not occurred and that the decline is an indication of distressed transactions and not reflective of the underlying value of the company?
PwC response
There are times when a distressed transaction may be put aside. However, a distressed market cannot be ignored. A decline in a company’s market capitalization, consistent with declines experienced by others within its industry, may be reflective of the underlying value of the company in a distressed market. Entities should distinguish between a distressed market, in which prices decline yet liquidity exists with sufficient volume, and a forced or distressed transaction. Transactions at depressed prices in a distressed market would not typically be distressed transactions.
Question BCG 9-8
If a company has not experienced a decline in its cash flows and expects that it will continue to meet its projected cash flows in the future, can the company assert that a triggering event has not occurred even though the decline in its market capitalization may be significant?
PwC response
While a company may not have experienced a decline in its cash flows and does not anticipate a future decline in projected cash flows, it is not appropriate to simply ignore market capitalization when evaluating the need for an interim impairment test. The market capitalization usually reflects the market’s expectations of the future cash flows of the company. A company may need to reconsider its projected cash flows due to heightened uncertainty about the amount and/or timing of cash flows, particularly for industries in which customer purchases are discretionary. Even if there is no change in a company’s cash flows, higher required rates of return demanded by investors in an economic downturn may decrease a company’s discounted cash flows. This, in turn, will decrease fair value.
Question BCG 9-9
If a company completed its annual goodwill impairment test during the fourth quarter and the company has not identified any significant changes in its business during the first quarter of the following year, is a continued depressed stock price or a further decline during the first quarter a triggering event for performing a goodwill impairment test?
PwC response
If a company’s stock price remains at a depressed level or continues to decline during the first quarter, it is important to ensure all available evidence has been evaluated to determine if a triggering event has occurred. The market capitalization generally reflects the market’s expectations of the future cash flows of the company. When the market capitalization drops, this may indicate that an event has occurred, or circumstances or perceptions have changed that would more likely than not reduce the fair value of a company’s reporting unit below its carrying amount. For example, the decline in the stock price may be an indicator that the company’s cash flow projections in future periods are too optimistic when considering the most recent macroeconomic forecasts.
A company should compare its actual results to date against budget and consider whether its projections appropriately reflect current expectations of the length and severity of recent economic conditions. Reviewing externally available information (e.g., analyst reports, industry publications, and information about peer companies) may provide further insight on the factors attributable to the decline and whether a reporting unit has had a triggering event. When evaluating external information, it is important to ensure it is comparable to the reporting unit under review and not solely to the consolidated company. Further, the amount by which the fair value of the reporting unit exceeded its carrying amount at the last goodwill impairment test date may also be a consideration in evaluating if it is more likely than not that the fair value of a reporting unit has dropped below its carrying amount.
Although annual goodwill impairment testing provides some assurance that goodwill impairment losses will be recognized in a timely manner, an entity’s management should have appropriate processes and controls in place to monitor for interim triggering events. These processes and controls, however, may vary from entity to entity and from reporting unit to reporting unit, depending upon, among other things, the extent of differences that exist between a reporting unit’s fair value and its carrying amount (i.e., cushion), the reporting unit’s industry and relevant markets, the entity’s experience, and the significance of goodwill recorded.
Similar to other impairment charges, financial statement users, auditors, and regulators may scrutinize the timing of goodwill impairment losses. Entities that recognize a goodwill impairment loss should be prepared to address questions about (1) the timing of the impairment charge, (2) the events and circumstances that caused the reporting unit’s goodwill to become impaired, and (3) for public entities, the adequacy of the entity’s “early warning” disclosures, including relevant risks and business developments leading up to the charge, in its public reporting for prior periods.

9.5.1.2 Annual goodwill impairment testing date

An entity may perform the annual goodwill impairment test for each reporting unit at any time during the year, as long as the test is consistently performed at the same time every year for that reporting unit. In addition, an entity may test the goodwill of different reporting units at different times during the year.
In determining the timing of the annual impairment test, the entity may find it useful to consider the following factors, at a minimum:
•  Availability of relevant information (e.g., prepared as part of the annual budgeting/forecasting cycle)
•  Time and resource requirements to perform the test and the effect on timely reporting to the public
•  Timing of the annual impairment test for indefinite-lived intangible assets assigned to the same reporting unit
•  Effects of impairment losses on the entity’s capital market communication (e.g., it might be difficult to explain an impairment loss in the first quarter, just after filing the annual report)
•  Seasonal cycles in the reporting unit’s business
Management may choose to test goodwill for impairment at a quarter-end date because of the more robust closing procedures that generally take place at quarter end. However, consideration should be given to the potential difficulty in completing the annual test prior to release of the quarterly results, especially if third-party valuations firms are engaged to assist management with its analysis. See BCG 9.8.2.5 for information on the accounting and disclosure considerations when an entity is unable to complete step two of the goodwill impairment test (prior to adopting ASU 2017-04) before issuing its financial statements.
A change in a reporting unit’s annual goodwill impairment test date is considered to be a change in accounting principle (i.e., a change in the method of applying an accounting principle). Accordingly, a company that makes a change in the annual goodwill impairment test date must demonstrate that the change is preferable in accordance with ASC 250-10-45-1 through ASC 250-10-45-2. An entity with publicly traded securities in the United States is generally required to obtain a preferability letter from its auditor when making a change in accounting principle. However, in a 2014 speech the SEC staff advised that if a company determines that a change in the annual goodwill impairment test date is not material, the SEC staff would no longer request a preferability letter so long as the company prominently discloses the change within the financial statements. Judgment is required in determining whether the change is material.
A change in accounting principle is required to be applied retrospectively to all prior periods unless it is impracticable to do so. ASC 250-10-45-9 provides guidance on impracticability for retrospective application, including conditions that either require assumptions about management’s intent in a prior period that cannot be independently substantiated or require significant estimates of amounts and it is impossible to distinguish information about those estimates objectively without the use of hindsight. We believe a change in the annual goodwill impairment test date may be applied prospectively if a company determines it to be impracticable to apply it retrospectively or the change does not have a material effect on the financial statements in light of the company’s design and operating effectiveness of its internal control over financial reporting in prior periods and the requirements under ASC 350-20 to assess goodwill impairment upon certain triggering events.
When an entity changes its annual goodwill impairment testing date, no more than 12 months may elapse between the original annual impairment test date and the new date selected for testing. Additionally, the change in the annual goodwill impairment test date cannot accelerate, delay, avoid, or cause an impairment charge.
Unlike a change in the annual goodwill impairment test date, ASC 350-30 does not specifically require the annual impairment test for indefinite-lived intangible assets to be performed at the same time each year. Therefore, a company does not need to assess preferability when it changes its impairment test date for indefinite-lived intangible assets. See BCG 8.3 for additional guidance on indefinite-lived intangible assets.
Example BCG 9-13 illustrates a change in the timing of the annual goodwill impairment test.
EXAMPLE BCG 9-13
A change in the timing of the annual goodwill impairment test
Company A, a public registrant, changes its fiscal year-end for competitive and business reasons from July 31 to December 31 and will prepare and file financial statements for the five-month period from August 1 through December 31. Historically, Company A has performed all of its annual impairment tests in its fourth quarter on May 31, and intends to realign the annual impairment test date to a similar date in its new fourth quarter (i.e., October 31).
Is Company A’s change in its annual impairment test date due to the change of its fiscal year-end considered a change in accounting principle?
Analysis
Yes. As such, it would need to be preferable. While each situation must be considered based on its own facts and circumstances, in this example, the change would allow the date of the impairment test to correspond with the new annual budgeting cycle and move the performance of the test closer to the new year-end. It is therefore likely that the new impairment date would be considered preferable.
Company A will need to perform impairment tests as of May 31 and October 31 in the year of change because skipping the May 31 test would result in a period greater than 12 months between annual impairment tests.

An entity may complete an acquisition shortly before the date of its annual impairment test for goodwill for all of its reporting units and may intend to use that same date for impairment testing of goodwill arising from the current acquisition. The question arises as to whether the acquiring entity could omit the first year’s annual impairment test for the recent acquisition, because the related valuation and determination of goodwill had just occurred; thus, impairment of goodwill shortly after the acquisition would be unlikely. However, omitting the impairment test for the goodwill in the recent acquisition at its usual annual testing date and performing it for the first time in the year after the acquisition would result in a period in excess of 12 months before the first goodwill impairment test.
As the first annual impairment test for the goodwill recorded in the current acquisition should be performed within 12 months of the date of close of the acquisition, the entity may wish to consider including the recent acquisition in its usual annual impairment test and, if so, performing step one of the impairment test. The entity should consider updating the acquisition valuation for any changes in the acquiree’s business. If the recent acquisition constitutes its own reporting unit, the reporting unit may not be a good candidate for the qualitative impairment assessment as there would not likely be cushion on the acquisition date. Despite the fact that a fair value analysis was just completed upon acquisition, the lack of cushion could make it a challenge to conclude based solely on the qualitative assessment that no further impairment testing is necessary. As such, the qualitative assessment may not be appropriate to use in this circumstance.
Alternatively, the entity would be required to use a different date, which would be within twelve months of the date of close of the acquisition, for its annual impairment test for the recently acquired goodwill. However, for practical reasons, most companies assign the same annual goodwill impairment test date to all of their reporting units, including those reporting units that have been recently acquired.
Question BCG 9-10 and Question BCG 9-11 explore additional scenarios related to the timing of a company’s annual goodwill impairment testing.
Question BCG 9-10
If a company performs step one of its annual goodwill impairment test at the beginning of the fourth quarter and passes step one, does the company need to further assess whether it may have a triggering event in the fourth quarter?
PwC response
While the company’s reporting units passed step one at the beginning of the fourth quarter, this does not eliminate the company’s need to continue to assess events and circumstances through the end of the reporting period which may indicate that it is more likely than not that a reporting unit’s fair value has fallen below its carrying amount. For example, management may need to consider whether a significant decline in the company’s stock price in the fourth quarter represents a triggering event.
Question BCG 9-11
If a company performs its annual goodwill impairment test at the beginning of the fourth quarter and fails step one, does the company need to assess events occurring after the annual testing date when assessing its impairment loss for the fourth quarter?
PwC response
If a calendar year-end company performs its annual goodwill impairment test on October 1 and fails step one, and later in the fourth quarter, the company’s stock price declines significantly, or other indicators of potential impairment arise, the company would need to give further consideration to the factors. Subsequent declines in a company’s market capitalization may be an affirmation of facts and circumstances that existed as of the annual impairment test date or may represent new events that should be considered as an interim triggering event.
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