Goodwill Impairment: Immediate Write-offs

Natalie Tatiana Churyk, PhD, CPA, and Brad Cripe, PhD, CPA

In 2001, FASB issued Statement of Financial Accounting Standards (SFAS) 142 (now, Accounting Standards Codification [ASC] section 350-20), Goodwill and Other Intangible Assets, which provided goodwill impairment guidance for reporting periods beginning after December 15, 2001. The standard was a marked departure from Accounting Principles Board (APB) Opinion 17, Intangible Assets, because it replaced a systematic, objective approach to the expensing of goodwill with a more subjective, heterogeneous approach. Whereas APB Opinion 17 viewed goodwill as a cost and provided an arbitrary and finite life over which it was to be expensed, SFAS 142 (ASC 350-20) views goodwill as an economic resource with an indefinite life that may fluctuate in value over time. While the standard does not allow the book value of goodwill to be increased, it does require goodwill to be tested for impairment using a two-step process whereby the fair value of the reporting unit (defined in SFAS 142 [ASC 350-20-35-33–46] as an operating segment or component), including any goodwill, is compared to its book value. When book value exceeds fair value, an impairment is necessary to the extent that reported goodwill on the balance sheet exceeds management's estimate of implied goodwill—the difference between the fair value of the unit and the fair value of its net identifiable assets.