Performing a qualitative assessment can save time and money.
Before performing the quantitative test for impairment of goodwill (or any other indefinite-lived asset), an entity has the option of performing a qualitative assessment to determine whether it is more likely than not that the indefinite-lived asset is impaired.
If those qualitative factors suggest that it is more likely than not that the indefinite-lived asset is impaired, the entity must perform the quantitative test for impairment.
An entity has the option to omit the qualitative assessment (Step 0) and go straight to the quantitative test of impairment (Step 1).
Performing a quantitative impairment test
In part I, we outlined the order of impairment testing for assets held and used. Application of testing is as follows:
1. Quantitative test: ASC 350 indefinite-lived assets other than goodwill
Determine the fair value of the indefinite-lived asset at the measurement date.
Best practice: Use the same valuation methodology used in the initial recognition of the asset, if appropriate (e.g. relief-from-royalty valuation method used for trade name/trademark valuation at the acquisition date and subsequently for impairment testing).
If the FV is less than carrying value, record an impairment charge to write down the asset’s carrying value to FV.
2. If an ASC 360 trigger event has occurred, perform an ASC 360 Recoverability Test
Determine if the asset group is recoverable:
Calculate undiscounted cash flows of asset group by summing the following amounts:
Calculate future cash flows for the remaining economic life of the primary asset of the asset group, not to exceed earlier of expected sale date or remaining depreciation life.
Add estimated proceeds at disposal less cost to dispose.
Subtract cash outflows necessary to obtain projected cash inflows, including future expenditures to maintain the asset.
Compare the projected undiscounted cash flows above to the carrying amount of the asset group.
If the undiscounted cash flows exceed the carrying amount of the asset group, the asset group is deemed recoverable and an impairment charge is not required or permitted. If the undiscounted cash flows are less than the carrying amount of the asset group, the asset group is not recoverable.
If the asset group is not recoverable:
Estimate the fair value of the asset group.
Cash flows may be different than recoverability cash flows as fair value is based on market participant assumptions.
If the fair value (FV) is less than carrying value (CV), record an impairment charge to write down the asset’s carrying value to FV.
MorganFranklin has the experience and expertise to assist both public and private companies with impairment testing related to goodwill, other non-amortizable intangible assets, and long-lived assets. We work with management to ensure a smooth and efficient process through project completion and provide an analysis that will stand up to auditor review and the scrutiny of third-party regulators. Learn more about MorganFranklin’s technical accounting and financial reporting service line.