Qualitative Evaluation To Determine The Necessity of Step 1 of The Goodwill Impairment Test

www.SingerLewak.com | 877.754.4557 Public Company Financial Executive Briefing

QUALITATIVE EVALUATION TO DETERMINE THE NECESSITY OF STEP 1 OF THE GOODWILL IMPAIRMENT TEST
By Jim Pitrat, CPA - Practice Leader, Assurance & Advisory Practice
OCTOBER 4, 2011

Executive Summary: The FASB has issued ASU No. 2011-08 , Testing Goodwill for Impairment, which amends FASB ASC 350-20 to allow-but not require-an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of determining whether to perform the step one of the two-step impairment test.
Under the new rules, the calculation of a reporting units fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. The new rules do not impact the manner in which the eventual calculation is performed.

NEW RULES
Following is a discussion of the amendments to FASB ASC 350-20 . Companies may choose the option of assessing qualitative factors to determine whether it is necessary to perform the first step in the two-step impairment testing process. Relevant events and circumstances must be taken into account in determining whether or not it is more likely than not that impairment exists. In evaluating these circumstances, greater weight should be assigned to events and circumstances that most affect a reporting units fair value or the carrying amounts of its assets. Relevant events and circumstances include the following: Macroeconomic conditions (economic factors, limitations on access to capital, fluctuations in foreign exchange rates, etc...) Industry and market conditions (Deterioration in the environment in which the entity operates, increased competition, a change in demand for the entitys products or services, regulatory or political developments, or a decline in market dependent multiples or metrics either relative to the entitys peers or in absolute terms) Changes in the costs of products or to produce products Declining financial performance continued on page 2

Other entity-specific events Sustained decline in the entitys share price Positive and mitigating factors, events, and circumstances If applicable, based on a recent fair value calculation, the difference between fair value and the carrying amount of the reporting unit, subject to limitations as to time and impact Other factors as appropriate

After assessing the qualitative factors, if it is determined that it is more likely than not that the reporting units carrying amount is greater than its fair value, Step 1 of the impairment test is required to be performed, or it is not more likely than not that the units carrying amount does not exceed its fair value, then Step 1 (and thus also Step 2) of the impairment test need not be performed. The amended guidance does not change the current requirements that goodwill of a reporting unit should be tested for impairment between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the unit below its carrying amount, or for a reporting unit with a zero or negative carrying amount, Step 2 of the impairment test must be performed on an annual or interim basis if events or circumstances indicate that it is more likely than not that a goodwill impairment exists.

EFFECTIVE DATE
The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is allowed.

FOR FURTHER INFORMATION, PLEASE CONTACT ONE OF THE FOLLOWING:

JimPitrat: JPitrat@singerlewak.com 310.477.3924 PracticeLeader Assurance&Advisory HarmeetSingh: HSingh@singerlewak.com 408.294.3924
BusinessCombinationsSubjectMatterExpert

GaleMoore: GMoore@singerlewak.com 949.261.8600

BusinessCombinationsSubjectMatterExpert

LosAngeles,SiliconValley

Los Angeles, OrangeCounty,SanDiego