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13.5 Assignment and impairment of goodwill (post-ASU 2017-04)
Publication date: 28 Feb 2022
us IFRS & US GAAP guide
The definition of the levels at which goodwill is assigned/allocated and tested for impairment varies between the two frameworks. Specifically, in determining the unit of account for goodwill impairment testing, US GAAP uses a segment reporting framework while IFRS focuses on the lowest level of identifiable cash inflows (cash generating unit) or groups of cash generating units at which goodwill is monitored.
Additional differences in the impairment testing methodologies could create further variability in the timing and extent of recognized impairment losses.
In January 2017, the FASB issued ASU 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. The change makes US GAAP more similar to IFRS because IFRS also has a single step for goodwill impairment. However, other differences remain.
The revised guidance was 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 that began after December 15, 2019. 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 and must be applied to all goodwill impairment tests within that fiscal year. See BCG 9.1 for detailed guidance on effective dates.
US GAAP | IFRS |
Goodwill is assigned to an entity’s reporting units, defined as the same as, or one level below, an operating segment. The determination of reporting units is based on a segment reporting structure.
Goodwill is tested 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 in accordance with ASC 350-20-35-30.
When performing the goodwill impairment test, an entity may first assess qualitative factors to determine whether the quantitative goodwill impairment test is necessary. If the entity determines, based on the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is below its carrying amount, the impairment test is performed. An entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative assessment.
| Goodwill is allocated to a cash-generating unit (CGU) or group of CGUs (not larger than an operating segment) based on how goodwill is monitored for internal management purposes. A CGU is the smallest identifiable group of assets that generates cash inflows largely independently of other assets or groups of assets.
Goodwill is tested for impairment at least on an annual basis and between annual tests at the end of each reporting period if an event occurs or circumstances change that may indicate an impairment in accordance with IAS 36.9.
Goodwill impairment testing is performed using a one-step approach:
The recoverable amount of the CGU or group of CGUs (i.e., the higher of its fair value less costs of disposal and its value in use) is compared with its carrying amount.
Any impairment loss is recognized as the excess of the carrying amount over the recoverable amount.
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Upon adoption of ASU 2017-04, Step 2 of the goodwill impairment test is removed. As a result, goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
The same one-step impairment test is applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities are required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.
Private companies/NFP entities have the option to amortize goodwill on a straight-line basis over a period of up to ten years, and apply a trigger-based, single-step impairment test at either the entity level or the reporting unit level at the company’s election.
| When testing a CGU to which goodwill has been allocated for impairment, there may be an impairment indicator related to an asset within the unit containing the goodwill. In such circumstances, the entity tests the asset for impairment first and recognizes any impairment loss for that asset, before testing the CGU containing the goodwill for impairment. Then, if there is an impairment loss on the CGU, the impairment loss is allocated first to goodwill and then on a pro rata basis to the other assets of the CGU or group of CGUs to the extent that the impairment loss exceeds the carrying value of goodwill.
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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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