testing goodwill for impairment: overview and implications...

Testing Goodwill for Impairment:Overview and Implications of Recent Changes to ASC 350-20

Module 1: Course introduction

© 2011 Deloitte Global Services Limited. 3

Agenda

Course overview

Overview of changes to guidance

Case study

Observations and action plan

Q&A

Wrap up


• Identify and describe changes to the goodwill impairment guidance.

• Discuss accounting and auditing implications.

• Discuss professional judgment and professional skepticism issues to consider related to the updated guidance.

• Anticipate and prepare for key conversations with the entity related to the changes.

• Examine and practice accounting and audit implications in case scenario.

Objectives

Module 2: Overview of changes to the guidance on testing goodwill for impairment


• Background for FASB decisiono In December 2010, the FASB added a project to its agenda to develop an alternative to

the current goodwill impairment assessment guidance.

o Project was in response to concerns raised by preparers for nonpublic entities over the cost and complexity of performing step one of the goodwill impairment process.

• Purposeo It gives entities the option of performing a qualitative assessment of whether the fair

value of a reporting unit is more-likely-than-not less than the carrying amount.

Background and purpose of the update


• Amendments are effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011.

• Early adoption is permitted.

Effective date and transition


• Applies to all entities, both public and nonpublic, that have goodwill recorded on their balance sheet

• Does not amend the annual testing requirements for other indefinite lived intangible assets

Scope


Based on qualitative factors, is it more-likely-than-not that the fair value of the reporting unit is less than the carrying amount?

This Step is OPTIONAL!

No further testing required

No

Step 1: Is the fair value of the reporting unit less than its carrying

amount, including goodwill?

Step 2: Determine the implied fair value of goodwill and compare to the

carrying amount to determine whether goodwill is impaired

Yes

Yes

No

Main provisionsChange #1–Option of performing a qualitative assessment before calculating fair value of the reporting unit


• Macroeconomic conditions

• Industry and market considerations

• Increases in raw materials, labor, or other costs that have a negative effect on earnings

• Overall financial performance

• Entity-specific events

• Events affecting a reporting unit

• If applicable, a sustained decrease (both absolute and relative to its peers) in share price

Main provisionsChange #2–List of qualitative assessment factors

The qualitative factors listed above also apply to interim testing.


• Entities should take the following into account when considering qualitative factors:o Significance and adversity of each factor relative to fair value

of reporting unit

o Positive factors and mitigating circumstances that may affect analysis

o If the entity has a recent fair value calculation for the reporting unit, whether the fair value of the reporting unit exceeded its carrying amount by a substantial margin

o Factors in their totality – no factor is meant to be determinative or trigger an impairment test on its own

o Qualitative factors are not all-inclusive

Main provisionsChange #2–List of qualitative factors (continued)


• ASC 350-20 currently allows entities to carryforward a detailed calculation of the fair value of the reporting unit if certain conditions are met.

1. The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity's segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.)

2. The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin.

3. Based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote.

• Entities currently using this option would now need to perform a qualitative assessment or move straight to the quantitative Step 1 calculation.

Main provisions

Change #3 – Carryforward option removed


Areas of no change

• Step 1 and Step 2 of Goodwill Impairments test

• How goodwill is calculated or assigned to reporting units

• Requirement to test goodwill annually for impairment

• Requirement to test goodwill for impairment between annual tests if events or circumstances warrant

• Current guidance for testing other indefinite-lived intangible assets for impairment

• Goodwill impairment analysis under IFRS

Module 3:Galaxy Sports case study


• Read handout 1, Galaxy Sports case study• Discuss the case study discussion question #1 with your table team• Prepare your response for debriefing

Case study: Galaxy SportsTeamTeam

Table discussions Discussion question #1 – 20 minutes

Discussion question #1 debrief – 10 minutes


1. Do you believe management has appropriately supported its assertionthat it is more-likely-than-not that the fair value of each reporting unit is greater than the carrying amount? Why or why not?

What additional analysis or supporting documentation, if any, would you request from management to support their assertions? Consider the qualitative factors both generally and individually and in their totality, as outlined in the memo.

Case study: Galaxy Sports discussion question #1TeamTeam

Table discussions Discussion question #1 - 20 minutes


Summarize and present your team’s findings

1. Do you believe management has appropriately supported its assertionthat it is more-likely-than-not that the fair value of each reporting unit is greater than the carrying amount? Why or why not?

What additional analysis or supporting documentation, if any, would you request from management to support their assertions? Consider both generally and the qualitative factors, individually and in their totality, as outlined in the memo.

Case study: Galaxy Sports discussion question #1 debrief TeamTeam

Discussion question #1 debrief - 10 minutes


2. What audit documentation might exist in other parts of the audit file that could be considered when evaluating the appropriateness of management’s qualitative analysis? What audit practice aids and resources would you consider using when developing your professional judgments regarding management’s qualitative analysis?

3. Do you believe conversations between engagement leadership and entity management will be needed in order to close any “expectation gap” that may exist between the extent of documentation management thinks is needed to support their qualitative assertions and what we may need from an audit perspective?

4. Do you think your clients will utilize the qualitative assessment? If so, what concerns do you have about the analysis they may prepare?

Observations and action plan

Observations and action plan Discussion questions #2 - 4 – 15 minutes

Discussion questions #2 - 4

Module 4: Course wrap-up


Testing Goodwill for Impairment:Overview and Implications of Recent Changes to ASC 350-20 Key learning points

• Understand the recent changes to testing for goodwill for impairment ASC 350-20 and its implications.

• Apply new testing for goodwill for impairment ASC 350-20 guidance.

• Have an action plan for implementing new guidance.


Questions?

© 2008 Deloitte Touche Tohmatsu

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