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The following section applies to reporting units with a positive carrying amount. See BCG 9.6.5 for guidance regarding impairment testing of reporting units with zero or negative carrying amounts.
The carrying amount of a reporting unit’s goodwill should be tested for impairment at least on an annual basis and in between annual tests in certain circumstances. An entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. The quantitative impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity should consider the totality of all relevant events or circumstances that affect the fair value or carrying amount of a reporting unit.
ASC 350-20-35-3C provides examples of such events and circumstances.

ASC 350-20-35-3C
In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances. Examples of such events and circumstances include the following:
  1. Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
  2. Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development
  3. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
  4. Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
  5. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
  6. Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
  7. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).

These examples are not all-inclusive as noted in ASC 350-20-35-3F. An entity should consider other relevant events or circumstances specific to its reporting units when determining whether to perform step one of the impairment test. For example, the AICPA Accounting and Valuation Guide – Testing Goodwill for Impairment (“AICPA Goodwill Guide”) provides additional examples of events that may require consideration such as (1) market reaction to a new product or service, (2) technological obsolescence, (3) a significant legal development, (4) contemplation of a bankruptcy proceeding, or (5) an expectation of a change in the risk factors or risk environment influencing the assumptions used to calculate the fair value of a reporting unit, such as discount rates or market multiples.
During the assessment, an entity should consider each adverse factor as well as the existence of any positive and mitigating events and circumstances, including the difference between a reporting unit’s fair value and carrying amount if determined in a recent fair value calculation (“cushion”).
Entities should give more weight to those events and circumstances that impact most significantly a reporting unit’s fair value or carrying amount. Some events and circumstances will affect most, if not all, reporting units. For example, many entities likely will determine that it is necessary to perform step one of the impairment test in an unfavorable economic environment. However, the relative importance of the various factors will be different for each reporting unit.
None of the individual examples summarized above are intended to represent standalone triggering events that would require an entity to perform step one of the goodwill impairment test. Similarly, the existence of positive and mitigating events and circumstances would not represent a rebuttable presumption that an entity does not need to perform step one of the goodwill impairment test.
If, after assessing the totality of events or circumstances such as those described above, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative goodwill impairment test would be needed to identify potential goodwill impairment and measure an impairment loss, if any. If the entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no further impairment testing is necessary.
Example BCG 9-14 illustrates the application of the qualitative goodwill impairment assessment by a company with two reporting units.
EXAMPLE BCG 9-14
Goodwill impairment assessment by a company with two reporting units
Company A has two reporting units: Reporting Unit X and Reporting Unit Y. The most recent annual step one impairment test, completed one year ago, resulted in a 40% cushion (i.e., fair value exceeded carrying amount by 40%) for Reporting Unit X and a 10% cushion for Reporting Unit Y. During the current year, macroeconomic trends have improved and the markets in which Reporting Units X and Y operate have remained stable. Company A has experienced increased access to capital at lower rates and market capitalization has trended higher. Analysts reported a positive outlook for Company A. While there was limited deal activity in the industry, the deals that were completed had multiples consistent with the multiples used by Company A in the valuation of its reporting units in the prior year. Demand has grown for Reporting Unit X’s products as evidenced by a better-than-expected increase in revenue, lower costs, and higher profit margins, resulting in Reporting Unit X’s operating results exceeding budget. Demand for Reporting Unit Y’s products, on the other hand, has been soft due to intense competition. As a result, Reporting Unit Y’s revenue and profit margins were flat as compared to the prior year, but below budget. Company A had no change in management.
Should Company A perform a qualitative or quantitative assessment for Reporting Units X and Y?
Analysis
In this fact pattern, Company A would likely perform a qualitative assessment for Reporting Unit X. The starting cushion of 40%, positive macroeconomic and market indicators, and the current year results exceeding budget indicate that the entity’s management may be able to conclude, absent other significant negative information, that it is more likely than not that the fair value of Reporting Unit X exceeds its carrying value.
In contrast, Company A would likely proceed directly to step one for Reporting Unit Y. The lack of significant beginning cushion combined with the adverse impact of intense competition on revenue and profit margins makes it more difficult for Company A to conclude, solely using a qualitative assessment, that no further impairment testing is necessary. Because small changes in the assumptions or inputs could impact the valuation of Reporting Unit Y, management would likely be unable to conclude, based solely on a qualitative assessment, that it is more likely than not that the fair value of Reporting Unit Y exceeds its carrying value.

9.6.1 Selecting reporting units for the qualitative assessment

An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The selection of reporting units on which to perform the qualitative assessment is not an accounting policy decision that needs to be followed consistently every period. Therefore, an entity should tailor its use of the qualitative assessment based on specific facts and circumstances for each reporting unit.
Use of the qualitative assessment may be appropriate in many, but not all, situations. A qualitative assessment alone may not be sufficient to support a more likely than not assertion when certain adverse factors are present. In other cases, the qualitative assessment may not be cost effective compared to performing step one of the impairment test. If an initial review of the facts and circumstances suggests it will require an extensive qualitative assessment and there remains a strong possibility that step one may still need to be performed, an entity may conclude it will be more efficient to perform a step one test. An entity that already has an efficient and robust process in place for determining the fair value of its reporting units may prefer to bypass the qualitative assessment and proceed directly to step one of the goodwill impairment test rather than implement additional processes and internal controls for performing the qualitative assessment. Also, if a significant amount of time has elapsed since the last step one test, an entity may elect to perform a step one test as a means of refreshing its understanding of the extent of cushion between a reporting unit’s fair value and carrying amount.
The qualitative assessment will be most appropriate when there is significant cushion based on a recent fair value measurement and no significant adverse changes have since occurred. Conversely, a qualitative assessment alone may not be effective or efficient if the cushion indicated by the most recent fair value measurement is not significant. This is the case, for example, when a reporting unit has recently been acquired or reorganized, or its goodwill recently impaired. The lack of cushion in these circumstances would cause the ability of this reporting unit to pass step one to be highly sensitive to adverse changes in both entity-specific factors such as actual and forecasted cash flows and non entity-specific factors such as discount rates and market multiples.

9.6.2 Consider prior FV measurements in qualitative assessment

The amount of cushion, if any, between the fair value and the carrying amount of the reporting unit from a prior fair value measurement is a critical factor in the qualitative assessment. However, an entity should not look solely at the amount of cushion from a recent fair value measurement to determine whether to perform a qualitative assessment. An entity must first determine whether the assumptions and projections underlying the previous fair value measurement are still reasonable in the current period. For example, an entity’s actual results for the current year combined with updated current forecasts may differ from the entity’s prior year forecasts used in a discounted cash flow valuation model. The significance of the differences may indicate that the projections used for the last fair value calculation were too aggressive and that less weight should be given to the apparent cushion from the prior valuation. Conversely, more weight would likely be given to a prior cushion when actual results are consistent with or more favorable to the reporting unit’s fair value than prior projections.
Question BCG 9-12 considers the amount of cushion that may be required to start with a qualitative assessment of goodwill impairment rather than a step one impairment test.
Question BCG 9-12
How much cushion between a reporting unit’s fair value and its carrying amount is required to allow an entity to start with a qualitative assessment of goodwill impairment rather than a step one impairment test?
PwC response
There are no bright lines. The test is qualitative and should consider all facts and circumstances impacting the comparison of a reporting unit’s fair value to its carrying amount, including the length of time elapsed since the last fair value calculation and the impact of adverse qualitative factors. All else being equal, a reporting unit with significant cushion is more likely to allow an entity to start with a qualitative assessment than a reporting unit with little to no cushion.

9.6.3 Periodically refreshing a reporting unit’s fair value

Entities should consider periodically “refreshing” a reporting unit’s fair value calculation. The more time that has elapsed since a recent fair value calculation, the more difficult it may be to support a conclusion based solely on a qualitative assessment. The frequency with which an entity refreshes its fair value calculation for a reporting unit will depend on a variety of factors, including how much cushion existed at the last fair value calculation, the reporting unit’s financial performance, the current operating environment, the current market environment for similar entities, and any significant changes in the composition of the reporting unit. If an entity chooses not to refresh and determines that it will continue to apply the qualitative test, the entity may need to lessen the amount of weight it would place on the previous fair value calculation in its qualitative assessment.
Question BCG 9-13 considers how many years an entity can use a previously measured fair value of a reporting unit as a basis for assessing the extent of cushion between a reporting unit’s fair value and its carrying amount.
Question BCG 9-13
How many years can an entity use a previously measured fair value of a reporting unit as a basis for assessing the extent of cushion between a reporting unit’s fair value and its carrying amount?
PwC response
There are no bright lines. A determination of the appropriate length of time between quantitative measurements of the fair value of a reporting unit is a matter of judgment. Some entities may choose to establish policies requiring reporting unit fair values to be reassessed periodically. Even with such a policy, an entity may still need to determine a reporting unit’s fair value more frequently than the policy requires if events and circumstances indicate a step one impairment test is appropriate.

9.6.4 An entity’s assertion of its annual qualitative assessment

An entity should make a positive assertion about its conclusion reached and factors considered if it determines as part of its annual qualitative assessment that the step one test is unnecessary. Therefore, while the level of documentation will vary based on facts and circumstances specific to each reporting unit, an entity should clearly document the conclusion reached and factors considered in an annual test.
Question BCG 9-14 explores what processes an entity would be expected to have in place to support its conclusion reached based on the application of a qualitative assessment.
Question BCG 9-14
What processes would an entity be expected to have in place if it wishes to support its conclusion reached based on application of a qualitative assessment?
PwC response
An entity should make a positive assertion about its conclusion reached and the events and circumstances taken into consideration in performing a qualitative assessment. Therefore, in most cases, a robust process with supporting documentation will be needed to support an entity’s conclusion that a quantitative goodwill impairment test is not necessary.
Generally, entities that use the qualitative assessment should have in place a comprehensive process to:
•  Determine which factors are the key drivers of each reporting unit’s fair value and monitor changes in those factors
•  Identify the internal and external sources of information needed to monitor the relevant factors for each reporting unit; consider whether analyst and other external information is consistent with the entity’s assessment of events and circumstances that could impact the reporting unit’s fair value
•  Consider the amount of “cushion” from the most recent fair value calculation and evaluate the financial performance of the reporting unit since that analysis
•  Monitor changes in other market-based metrics that could impact significantly the fair value of the reporting unit, including items such as the long-term discount rate and market multiples for companies in the reporting unit’s peer group
•  Evaluate and weigh the impact of adverse and mitigating factors based on the extent those factors impact the comparison between fair value and carrying amount
•  Consider if, and how frequently, a step one analysis should be performed for the purpose of “refreshing’’ the baseline valuation
•  Affirmatively consider and document the qualitative assessment that includes consideration of the factors identified from the entity’s process and the basis for its conclusion; generally, the greater the extent of analysis needed to assert that no further testing is necessary, the greater the extent of documentation that should be prepared

9.6.5 Zero or negative carrying amounts (pre ASU 2017-04)

The guidance requires reporting units with zero or negative carrying amounts to be tested for impairment at least annually and, in certain circumstances, between annual tests. For these reporting units, an entity is required to qualitatively assess whether it is more likely than not that a goodwill impairment exists. If it is more likely than not that a goodwill impairment exists, the goodwill impairment test should be performed to measure the amount of impairment loss, if any.
In evaluating whether it is more likely than not that a goodwill impairment exists for these reporting units, an entity should, among other facts and circumstances, evaluate the same examples of qualitative factors as a reporting unit with a positive carrying amount described in BCG 9.6. In addition, an entity with a reporting unit with a zero or negative carrying amount should consider whether there are significant differences between the carrying amounts and the estimated fair values of the reporting unit’s assets and liabilities, including unrecognized intangible assets. If the fair value of recognized assets are estimated to exceed their carrying amounts or if the fair value of unrecognized assets (e.g., a trade-name intangible asset) are significant, this will reduce the implied fair value of goodwill in the step two test, and therefore, could impact the qualitative assessment.
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.
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