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7.4 Impairments of long-lived assets, intangibles, and goodwill
Publication date: 31 Mar 2022
us Fair value guide
Fair value measurements are not only a critical part of applying the acquisition method, but are also important in post-acquisition accounting, including the various impairment tests required by US GAAP. Under US GAAP, guidance for impairment testing of indefinite-lived intangible assets and goodwill is provided in ASC 350, while the guidance for long-lived assets is provided in ASC 360.
7.4.1 Impairment tests — key considerations
Key considerations in determining fair value to measure impairment, and specifically if an impairment is being measured using the fair value less costs of disposal for IFRS, include the following:
- Market participants — Management may start with internal cash flow estimates, but it then needs to incorporate the perspective of market participants. Reporting entities should not presume that entity-specific projected financial information is representative of market participant assumptions. One of the inputs to the discounted cash flow model is the discount rate. The weighted average cost of capital should reflect the starting point for determining the rate that a market participant would demand based upon industry-weighted average returns on debt and equity adjusted for the relative advantages or disadvantages of the entity, rather than an entity-specific rate.
- Markets — In determining fair value, a reporting entity must determine the principal or most advantageous market. In general, there may not be a principal market for the sale of the reporting unit (under US GAAP)/cash-generating unit (under IFRS) or indefinite-lived intangible asset being considered in the impairment analysis. If the reporting entity determines that there is no principal or most advantageous market, it should assess potential market participants and develop a hypothetical market based on its assessment of market participant assumptions.
- Valuation premise — The reporting entity should assess potential markets, considering whether the highest and best use of the asset is alone or in combination with other assets. The reporting entity should use market participant assumptions in this analysis. The highest and best use of the reporting unit/cash-generating unit from the perspective of market participants may differ from that of the reporting entity.
- Multiple valuation techniques — Although a discounted cash flow model may be the most suitable valuation technique in many cases, management should also consider the use of alternative methodologies each time an impairment test is performed. For example, valuation professions often use the market approach as a secondary method to the income approach when valuing a business. Reporting entities need to consider whether multiple approaches should be used when valuing reporting units/cash generating units. In determining the fair value of the reporting unit/cash generating unit, reporting entities may need to consider a weighting of reasonable results from all methods appropriate in the circumstances.
ASC 820, Example 3, Case A (ASC 820-10-55-36 through ASC 820-10-38A) and IFRS 13, Example 4 (IFRS 13.IE11 through IFRS 13.IE14) provide an example of the application of the ASC 820 framework in an impairment analysis. Issues such as asset groupings and allocations of losses are beyond the scope of this guide.
7.4.1.1 Fair value measurements in inactive markets
In inactive markets, market capitalization may not be representative of fair value and other valuation methods may be required to measure the fair value of an entity comprised of a single RU or CGU. Use of a value other than market capitalization will require other evidence and documentation that clearly support that the quoted market prices are not the best indication of fair value. The guidance discussed at FV 4.6 is helpful to address these situations.
Question FV 7-3 addresses whether the original transaction price can be an indicator of fair value in the first post-acquisition goodwill impairment test.
Question FV 7-3
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?
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 and IFRS 13.59 require 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. Therefore, the reporting entity should most likely make a new detailed determination of fair value when performing its first post-acquisition annual impairment test.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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