By Shannon Farr

The Financial Accounting Standards Board (FASB) recently approved new guidance that would permit an entity to first assess qualitative factors to determine whether the two-step impairment test procedures currently prescribed are necessary to be performed.
The Accounting Standards Update, scheduled to be published by the FASB this September, contains a list of qualitative factors such as the following for management to consider prior to the performance of the two-step impairment test:

• Macroeconomic conditions: a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates;
• Industry conditions: a deterioration in the market in which an entity operates, increased competition, a decline in market-dependent multiples or metrics, or a regulatory or political development;
• Cost factors: increases in raw materials, labor, or other significant costs;
• Overall financial performance: negative or declining cash flows;
• Entity-specific events: changes in management or key personnel, changes in strategy, contemplation of bankruptcy, litigation issues, among others.

If qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity is required to proceed to Step 1 of the goodwill impairment test, which identifies potential impairment by comparing the fair values of each of the reporting units to its carrying value. If the carrying value of a reporting unit exceeds its fair value, Step 2 of the goodwill impairment testing process is used to measure and recognize any impairment.

Although the new guidance is effective for annual and interim goodwill impairment testing for fiscal periods beginning after December 15, 2011, early adoption is permitted.

As with any significant update to accounting standards, management is encouraged to coordinate the implementation of this new guidance with the external auditors.

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