Table Of ContentAcco u n t i n g & vA luAt i o n g u i d e
testing goodwill
for impairment
12847-359
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iii
Preface
About This AICPA Accounting and Valuation Guide
ThisAICPAAccountingandValuationGuidehasbeendevelopedbytheAICPA
Impairment Task Force (task force) and AICPA staff. This guide provides
guidance and illustrations for preparers of financial statements,independent
auditors, and valuation specialists1 regarding the accounting, valuation, and
disclosuresrelatedtogoodwillimpairmenttesting.2Thevaluationguidancein
this guide is focused on measuring fair value of a reporting unit for financial
reporting purposes.
The financial accounting and reporting guidance contained in this guide has
beenreviewedandapprovedbytheaffirmativevoteofatleasttwo-thirdsofthe
membersoftheFinancialReportingExecutiveCommittee(FinREC),whichis
the designated senior committee of the AICPA authorized to speak for the
AICPAintheareasoffinancialaccountingandreporting.Conformingchanges
madetothefinancialaccountingandreportingguidancecontainedinthisguide
willbeapprovedbytheFinRECChair(orhisorherdesignee).Updatesmade
tothefinancialaccountingandreportingguidanceinthisguideexceedingthat
of conforming changes will be approved by the affirmative vote of at least
two-thirds of the members of FinREC.
This guide
•
identifiescertainrequirementssetforthintheFinancialAccounting
StandardsBoard(FASB)AccountingStandardsCodification®(ASC).
•
describesFinREC’sunderstandingofprevalentorsolepracticecon-
cerning certain issues. In addition, this guide may indicate that
FinRECexpressesapreferencefortheprevalentorsolepractice,or
it may indicate that FinREC expresses a preference for another
1Although this guide uses the term valuation specialist, Statement on Standards for
Valuation Services No.1,Valuation of a Business,Business Ownership Interest,Security,or
Intangible Asset (AICPA, Professional Standards, VS sec. 100), which is a part of AICPA
Professional Standards, defines a member who performs valuation services as a valuation
analyst. The term valuation specialist, as used in this guide, is synonymous to the term
valuationanalyst,asusedinAICPAProfessionalStandards.
Whenreferringtothevaluationspecialistinthisguide,itiscommonlypresumedthatthe
valuation specialist is an external party, but if individuals within the entity possess the
abilities,skills,andexperiencetoperformvaluations,theycanalsoserveinthecapacityofa
valuationspecialist.
2On July 1, 2013, the Financial Accounting Standards Board (FASB) issued for public
comment several Private Company Council (PCC) proposals that address private company
stakeholder concerns raised about the relevance and complexity of certain aspects of U.S.
generallyacceptedaccountingprinciples(GAAP).
Oneoftheproposals,ProposedAccountingStandardsUpdateIntangibles—Goodwilland
Other(Topic350):AccountingforGoodwill(aproposalofthePrivateCompanyCouncil),which
is derived from PCC Issue No. 13-01B, Accounting for Goodwill Subsequent to a Business
Combination, would permit amortization of goodwill and a simplified goodwill impairment
model.ThiswouldenableprivatecompaniesthatelecttheaccountingalternativewithinGAAP
toamortizegoodwillonastraight-linebasisovertheusefullifeoftheprimaryassetacquired
inabusinesscombination,nottoexceed10years.Goodwillwouldbetestedforimpairmentonly
whenatriggeringeventoccursthatwouldindicatethatthefairvalueofanentitymaybebelow
itscarryingamount.Moreover,goodwillwouldbetestedforimpairmentattheentity-widelevel
ascomparedtothecurrentrequirementtotestatthereportingunitlevel.
PleaserefertotheFASBwebsiteforthelatestinformationregardingthestatusofthis
project:www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&
cid=1351027243076.
iv
practice that is not the prevalent or sole practice; alternatively,
FinREC may express no view on the matter.
•
identifiescertainother,butnotnecessarilyall,practicesconcerning
certain accounting issues without expressing FinREC’s views on
them.
•
provides guidance that has been supported by FinREC on the ac-
counting,reporting,ordisclosuretreatmentoftransactionsorevents
that are not set forth in FASBASC.
Accounting guidance for nongovernmental entities included in this AICPA
Accounting and Valuation Guide is a source of nonauthoritative accounting
guidance.FASBASCistheauthoritativesourceofU.S.accountingandreport-
ingstandardsfornongovernmentalentities,inadditiontoguidanceissuedby
theSecuritiesandExchangeCommission.AICPAmembersshouldbeprepared
to justify departures from U.S. generally accepted accounting principles, as
discussedinRule203,AccountingPrinciples(AICPA,ProfessionalStandards,
ET sec.203 par..01).In addition,AICPA members who perform engagements
to estimate value that culminate in the expression of a conclusion of value or
a calculated value are subject to the requirements of AICPA Statement on
Standards forValuation Services.
This guide does not include auditing guidance;3 however,auditors may use it
toobtainanunderstandingoftheaccountingrequirementsandthevaluation
process applicable to goodwill impairment testing.
Recognition
Impairment Task Force (2009–2013)
(members when this edition was (past members who contributed to
completed) this edition)
Greg S.Franceschi,Co-Chair Alfred M.King
Michael J.Morrissey,Co-Chair Mark Mahar
Lawrence N.Dodyk Kenneth Marceron
3In October 2011, the AICPA Auditing Standards Board (ASB) issued Statement on
Auditing Standards (SAS) No. 122, Statements on Auditing Standards: Clarification and
Recodification(AICPA,ProfessionalStandards),whichcontains39clarifiedSASsandsuper-
sedesalloutstandingSASsthroughSASNo.121,exceptfor8SASs.SASNo.122represents
theredraftingofexistingSASstoapplytheASB’sclaritydraftingconventionsandtoconverge
with International Standards on Auditing. SAS No. 122 is effective for audits of financial
statementsforperiodsendingonorafterDecember15,2012.Refertoindividualsectionsfor
specificeffectivedatelanguage.
AU-C section 540, Auditing Accounting Estimates, Including Fair Value Accounting
Estimates,andRelatedDisclosures(AICPA,ProfessionalStandards),addressestheauditor’s
responsibilitiesrelatingtoaccountingestimates,includingfairvalueaccountingestimatesand
relateddisclosures,inanauditoffinancialstatements.ThissectionsupersedesAUsection342,
Auditing Accounting Estimates (SAS No. 57), and AU section 328, Auditing Fair Value
MeasurementsandDisclosures(SASNo.101).AU-Csection540combinestherequirementsand
guidancefromAUsection342(SASNo.57)andAUsection328(SASNo.101),butitdoesnot
changeorexpandthosestandardsinanysignificantrespect.
AuditorsmayalsofindithelpfultorefertotheAICPAAuditGuideSpecialConsiderations
inAuditingFinancialInstruments,which,amongotherthings,addressestheauditor’srespon-
sibilitiesrelatingtoauditingaccountingestimates,includingfairvalueaccountingestimates,
andrelateddisclosures.
v
Impairment Task Force (2009–2013)
Gregory Sigrist
Mark J.Edwards
Brian Stevens
Elizabeth Goines
Don Zakrowski
Ellen Larson
Thomas J.Sciametta
BrennaWist
Mark Zyla
AICPA Senior Committee
Financial Reporting Executive Committee
(members when this edition was (past members who contributed to
completed) this edition)
Richard Paul,Chair Jay D.Hanson,Chair
AaronAnderson DavidAlexander
Linda Bergen RickArpin
Adam Brown RobertAxel
Terry Cooper Kimber K.Bascom
Lawrence Gray Glenn Bradley
Randolph Green JamesA.Dolinar
Mary E.Kane L.Charles Evans
Jack Markey Bruce Johnson
Joseph D.McGrath Jonathan Nus
Rebecca Mihalko Terry Spidell
Steve Moehrle Richard Stuart
Angela Newell Dan Zwarn
BJ Orzechowski
Mark Scoles
Bradley Sparks
Dusty Stallings
The AICPA and the Impairment Task Force gratefully acknowledge the fol-
lowing individuals for their assistance in development of this guide: Erin E.
Devine,PeterF.Lyster,DanMurdock,BJOrzechowski,DaveSewell,Christo-
pher Stephens,Evan Sussholz,andAmandaYokobosky.
TheAICPAandtheImpairmentTaskForcealsothankDorisM.Blaschforher
invaluable assistance in developing this guide.
vi
AICPA Staff
Yelena Mishkevich
SeniorTechnical Manager
Accounting Standards
Daniel J.Noll
Director
Accounting Standards
Guidance Considered in This Edition
AuthoritativeguidanceissuedthroughMay1,2013,hasbeenconsideredinthe
development of this edition of the guide.
Thisguideincludesrelevantguidanceissueduptoandincludingthefollowing:
•
FASB Accounting Standards Update No. 2013-11, Income Taxes
(Topic740):PresentationofanUnrecognizedTaxBenefitWhenaNet
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
CarryforwardExists(aconsensusoftheFASBEmergingIssuesTask
Force)
•
AICPA’sStatementonStandardsforValuationServicesNo.1,Valu-
ationofaBusiness,BusinessOwnershipInterest,Security,orIntan-
gibleAsset (AICPA,Professional Standards,VS sec.100)
Readers of this guide should consider guidance issued subsequent to those
items listed previously to determine their effect on entities covered by this
guide.Indeterminingtheapplicabilityofrecentlyissuedguidance,itseffective
date should also be considered.
AICPA.org Website
The AICPA encourages you to visit its website at www.aicpa.org and the
Financial Reporting Center at www.aicpa.org/FRC. The Financial Reporting
Centersupportsmembersintheexecutionofhigh-qualityfinancialreporting.
Whetheryouareafinancialstatementprepareroramemberinpublicpractice,
this center provides exclusive member-only resources for the entire financial
reporting process and provides timely and relevant news, guidance, and ex-
amples supporting the financial reporting process, including accounting, pre-
paringfinancialstatements,andperformingcompilation,review,audit,attest,
or assurance and advisory engagements. Certain content on AICPA websites
referenced in this guide may be restricted toAICPA members only.
TableofContents vii
TABLE OF CONTENTS
Chapter Paragraph
Introduction .01-.05
1 ConceptsandApplicationofFinancialAccountingStandards
BoardAccountingStandardsCodification820 .01-.28
GeneralConceptsofFASBASC820 ................... .02-.05
ApplyingFASBASC820ValuationTechniquesto
ReportingUnits ...................................... .06-.18
IncomeApproach ............................... .09-.11
MarketApproach ............................... .12-.16
AssetApproach................................. .17-.18
ApplyingFASBASC820FrameworktoReportingUnits .19-.28
DeterminetheUnitofAccount ................... .20
DeterminetheValuationPremise ................. .21-.23
IdentifythePotentialMarkets..................... .24-.25
DetermineMarketAccess ........................ .26
ApplytheAppropriateValuationApproaches..... .27
DeterminetheFairValue ........................ .28
2 AccountingConsiderationsWhenTestingGoodwillfor
Impairment .01-.67
Introduction........................................... .01-.04
Two-StepGoodwillImpairmentTest..................... .05-.09
IdentificationofReportingUnits ........................ .10-.18
AssigningAssetsandLiabilitiestoaReportingUnit ...... .19-.30
AssigningAssetsandLiabilitiestoaReporting
Unit—AdditionalConsiderations ..................... .31-.37
DebtRecognizedattheCorporateLevel .......... .31
DeferredTaxesRelatedtoAssetsandLiabilitiesof
aReportingUnit ............................... .32
CumulativeTranslationAdjustment ............... .33
ContingentConsiderationArrangements.......... .34-.37
AssigningRecordedGoodwilltoReportingUnits ........ .38-.39
AssigningRecordedGoodwilltoReporting
Units—AdditionalConsiderations ..................... .40-.50
ReportingUnitsWithNoncontrollingInterest ...... .40-.43
ReorganizationofReportingStructure ............ .44
GoodwillImpairmentTestingbyaSubsidiary ..... .45-.48
DisposalofAlloraPortionofaReportingUnit ... .49-.50
WhentoTestGoodwillforImpairment .................. .51-.57
ChangingAnnualTestDate ...................... .52-.53
TestingforImpairmentBetweenAnnualTestDates .54-.55
Contents
viii TableofContents
Chapter Paragraph
2 AccountingConsiderationsWhenTestingGoodwillfor
Impairment—continued
TestingGoodwillRemaininginaReportingUnit
UponDisposalofaPortionofaReportingUnit .. .56
OrderofImpairmentTesting ..................... .57
PreviousFairValueMeasurementsofaReportingUnit ... .58
Step2ofGoodwillImpairmentTest..................... .59-.64
AttributingGoodwillImpairmentstotheParentandthe
NoncontrollingInterest ............................... .65
DisclosureRequirements ............................... .66-.67
DisclosureRequirementsofAccountingPrinciples
GenerallyAcceptedintheUnitedStatesof
America ...................................... .66
SECDisclosureRequirements .................... .67
3 QualitativeAssessment .01-.26
Introduction........................................... .01-.02
IdentifyingInputsandAssumptionsThatMostAffectFair
Value ............................................... .03-.06
IdentifyingRelevantEventsandCircumstances .......... .07-.13
WeighingIdentifiedEventsandCircumstances .......... .14-.17
ConcludingontheTotalityofEventsandCircumstances .. .18-.21
OtherConsiderations ................................. .22-.26
4 MeasuringFairValueofaReportingUnit .01-.94
Introduction........................................... .01-.06
MarketParticipantAssumptions ........................ .07-.08
EffectsofNoncontrollingInterestWhenMeasuringthe
FairValueoftheReportingUnit ...................... .09-.16
ValuationTechniques .................................. .17-.20
UsingtheIncomeApproachtoEstimateFairValueofa
ReportingUnit....................................... .21-.42
TreatmentofRisk ................................ .22-.29
MeasuringFinalCashFlowAmountorTerminal
Value ......................................... .30-.33
AdjustmentstoProspectiveFinancialInformation .. .34
IncomeTaxConsiderations:TaxableVersus
NontaxableDetermination ..................... .35-.42
UsingtheMarketApproachtoEstimateFairValueofa
ReportingUnit....................................... .43
ConsiderationsinApplyingtheGuidelinePublic
CompanyMethod ................................... .44-.72
IdentificationofGuidelinePublicCompanies ...... .44-.47
Contents
TableofContents ix
Chapter Paragraph
4 MeasuringFairValueofaReportingUnit—continued
NumberofGuidelineCompaniesSelectedfor
Comparison................................... .48
HowtoCalculateMultiplesandWhichMultiplesto
Use ........................................... .49-.57
AdjustmentstoGuidelinePublicCompany
MultiplestoEnhanceComparability............. .58
AdjustmentstoSubjectReportingUnitFinancial
Data .......................................... .59
EliminationofMultiplesThatAreNotMeaningful .60-.61
HowtoSelectMultiplestoApplytotheSubject
ReportingUnit................................. .62-.65
WeightingofMultipleType ...................... .66-.67
EnterpriseVersusEquityLevelMultiples ........... .68
IssuesofNoncontrollingVersusControllingInterest .69-.70
CashandNonoperatingAssets .................. .71-.72
ConsiderationsinApplyingtheGuidelineCompany
TransactionsMethod ................................. .73-.78
LimitationsonAvailabilityofData ................ .74
AssessingRelevantTimePeriodforGuideline
CompanyTransactions ......................... .75
NumberofGuidelineCompanyTransactions
SelectedforComparison ....................... .76
HowtoSelectMultiplestoApplytotheSubject
ReportingUnit................................. .77
NoncontrollingVersusControllingInterest......... .78
ComparisonofFairValueMeasurementstoExternalFair
ValueIndications .................................... .79-.83
ComprehensiveExample .............................. .84-.94
Overview....................................... .84-.85
Step1ofGoodwillImpairmentTest............... .86-.91
Step2ofGoodwillImpairmentTest............... .92-.93
Schedules ...................................... .94
Appendix
A DisclosureofGoodwillandGoodwillImpairmentTesting
B TableofResponsibilitiesofManagementandtheExternal
ValuationSpecialist
Glossary
IndexofPronouncementsandOtherTechnicalGuidance
SubjectIndex
Contents
Introduction 1
Introduction
.01 FinancialAccountingStandardsBoard(FASB)AccountingStandards
Codification (ASC) 350, Intangibles—Goodwill and Other, requires an annual
impairment test of goodwill,at a level of reporting referred to as the reporting
unit. According to FASB ASC 350, entities have the option to first assess
qualitativefactorstodeterminewhetheritisnecessarytoperformthefirststep
ofthetwo-stepgoodwillimpairmenttest.Inotherwords,entitiesarenotrequired
tocalculatethefairvalueofareportingunitunlessitismorelikelythannotthat
the reporting unit’s fair value is less than its carrying amount.Alternatively,
entitieshaveanunconditionaloptiontobypassthequalitativetestandperform
thefirststepofthegoodwillimpairmenttestdirectly.Thefirststepcomparesthe
fairvalueofthereportingunitwithitscarryingamount;ifthefairvalueisless
than the carrying amount, then the second step is performed, measuring the
amount of the impairment loss,if any.
.02 This guide provides nonauthoritative accounting and valuation guid-
anceforimpairmenttestingofgoodwill.Specifically,itfocusesonpracticeissues
relatedtothequalitativeassessmentandthefirststepofthetwo-steptest.This
guideaddressessuchissuesasidentifyingreportingunitsandassigningassets
andliabilitiestoareportingunit.Italsodescribestheframeworkforperforming
theoptionalqualitativeassessmentandillustratesoneapproachofperforming
it.It also discusses measuring the fair value of a reporting unit in accordance
withtheguidanceinFASBASC820,FairValueMeasurement,andillustratesthe
valuationtechniquesoftenutilizedforthispurpose.Thisguidealsoprovidesan
illustration of the second step of the two-step goodwill impairment test.
.03 Measuring fair value requires a specialized skill either within the
entity or by using an external valuation specialist. Regardless of whether fair
value measurements are developed by management or a third party, manage-
mentisresponsibleforthefairvaluemeasurementsthatareusedtopreparethe
financial statements and for underlying assumptions used in developing these
fairvaluemeasurements.Auditorsareexpectedtounderstandhowthevaluation
techniquesusedformeasuringfairvaluecomplywiththerequirementsofFASB
ASC820,assessreasonablenessoftheinputs,assumptionsandvaluations,and
evaluateadequatenessoftherelateddisclosures.Thisguidewillhelppreparers,
auditors,and valuation specialists understand the requirements of FASBASC
350andFASBASC820andthevaluationtechniquesusedwhentestinggoodwill
for impairment.
.04 Thisguidedoesnotprovideanin-depthdiscussionoftherequirements
ofFASBASC820,butratherdescribestheimpactitsrequirementshaveonthe
assumptionsandtechniquesusedtovaluereportingunitswhentestinggoodwill
forimpairment.Thisguideprovidesexamples,discussions,andillustrationsofthe
approaches and techniques used most often in practice for measuring the fair
valueofreportingunits,specificallythediscountedcashflowmethod,theguide-
line public company method,and the guideline company transactions method.
.05 Thisguideonlyaddressesgoodwillimpairmenttesting.Ifgoodwilland
anotherasset(orassetgroup)ofareportingunitaretestedforimpairmentatthe
sametime,theotherasset(orassetgroup)isrequiredtobetestedforimpairment
beforegoodwill.Thisguidedoesnotaddressimpairmenttestingofotherassets
that may be a part of a reporting unit.
Accounting and Valuation Guide: Testing Goodwill for Impairment, First Edition. AICPA. AAG-GDW .05
© 2013 American Institute of Certified Public Accountants, Inc. Published 2013 by John
Wiley & Sons, Inc.
