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The New Rules of Goodwill Impairment Testing

Source: Financial Executives International TV

Stout Risius Ross
Jay Wachowicz, Managing Director, Valuation & Financial Opinions

Runtime: 8:13

Click here to download video.

Key Takeaways:

  1. The new “Step Zero” test:
    • Optional qualitative approach
    • Determines more likely than not (greater than a 50% probability) that fair value is greater than carrying value
    • Relates to both public and nonpublic businesses
    • Replaces triggering factors for interim testing
    • Effective for annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011
  2. Qualitative factors to consider:
    • General macroeconomic conditions
    • Industry and market conditions
    • Cost/Expense changes that negatively impact earnings
    • Decline/Improvement in financial performance
    • Company specific events
    • Reporting unit specific events
    • Changes in capital markets pricing
  3. Top 10 impairment testing pitfalls:
    • Coordination of financial forecasts
    • Supportability of assumptions underlying projections
    • Allocation of corporate overhead & assets /liabilities to reporting units
    • Expect rigorous long-lived asset impairment review for property, plant, and equipment as well as indefinite-lived intangibles
    • Substantiation of cost of capital in volatile capital markets environment
    • Applicability and magnitude of control premiums
    • Fair value versus net book value of interest-bearing debt to compute equity value
    • Reconciliation of the sum of ALL reporting units to capital markets value regardless of whether or not a reporting unit maintains goodwill on its books
    • Deferred income tax considerations in Step 1
    • Deferred income tax considerations in Step II

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