The Financial Accounting Standards Board (FASB) has approved an accounting standard which simplifies how a firm tests goodwill for impairment.
The FASB said the amendments will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.
Businesses will no longer be required to calculate the fair value of a reporting unit unless the firm determines, through a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.
The new guidance for the standard will include examples of the types of factors to consider in conducting the qualitative assessment.
“The Board’s decision today comes as a direct result of what we heard from private companies, which had expressed concerns about the cost and complexity of performing the goodwill impairment test,” FASB member Daryl Buck said.
The changes will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after 15 December 2011. Early adoption is permitted.
The FASB issued its initial proposal for revising the testing of goodwill for impairment in an exposure draft in April. The FASB expects to issue a final accounting standards update in September.