Goodwill And Intangible Assets: A Ten-Step Program for Public
and Nonpublic Entities
By Robert N. Waxman
SFAS 142 (issued June 2001), goodwill and certain intangible assets with an indefinite
life are no longer amortized, but are tested for impairment; an intangible asset
with a finite life is amortized over its useful life; and negative goodwill is
recorded as extraordinary income. Furthermore, equity-method goodwill will no
longer be amortized.
Implementing SFAS 142 will be challenging and entail
a lot of preparatory work. The challenges will include making the various fair
value measurements; deciding when there is an event or circumstance requiring
impairment testing; performing the tests; and determining reporting units, useful
lives, residual values, and amortization methods. Management and auditors should
immediately begin to analyze the impact of implementing SFAS 142.
The following ten-step program forms a general outline of some
of the implementation issues to be considered:
1. Scope. SFAS
142 applies to all entities, both public and nonpublic, if:
The entity has recorded intangible assets or goodwill.
Goodwill is embedded in investments carried under the equity method.
An excess reorganization value is recorded following SOP 90-7.
Goodwill is recorded by a subsidiary in its separate financial statements.
Transition. Review the SFAS 142 effective and transition dates to determine
when it applies to an entity (para. 4859).
3. Intangible assets.
Segregate and reclassify intangible assets that meet the separability criteria
from those that do not. Those that do not are subsumed in goodwill (SFAS 141,
para. 39). Then, segregate intangible assets with indefinite lives from those
with finite lives.
For an intangible with a finite life (para. 1215):
Determine its useful life (which may be longer than 40 years, although the SEC
believes this will be rare), amortization method, and residual value, if any (para.
Determine if there is an event or circumstance
(SFAS 144, para. 8) during the reporting period requiring the revision of the
useful life, or the recording of an impairment loss using the undiscounted cash
flow test per SFAS 144, para. 7.
For an intangible
with an indefinite life (para. 1617):
Determine if an event or circumstance during the reporting period requires that
an impairment loss be recorded (SFAS 144, para. 8).
In addition to the events and circumstances test, the impairment test must be
An intangible with an
indefinite life is impaired if its carrying amount is more than its fair value.
Determine if the intangible now has a finite life.
Determine the entitys
reporting units, that is, operating segments (under SFAS 131) or components, one
level below the operating segment (SFAS142, para. 30; EITF Topic D-101).
Determine the carrying amount of each reporting unit by assigning all assets (including
goodwill, intangible assets, and deferred taxes) and liabilities to them.
Establish the model and key assumptions that will be used to measure the fair
value of each reporting unit.
reporting period, review each of the specific events or circumstances that would
require goodwill be tested (para. 2829).
In addition to the events or circumstances test, the impairment test must be performed
Decide the date to perform the
annual step one test:
Step one of the impairment
test requires that the fair value of each reporting unit with goodwill be determined.
Compare the fair value of each reporting unit to its carrying amount. If the fair
value is less than the carrying amount, go to step two (para. 19). (Note that
if the entity meets the para. 27 Exception to the Need to Recompute Fair
Value, step one need not be performed.)
Step two of the impairment test compares the implied fair value of goodwill
to the carrying amount of goodwill. If the fair value is less than the carrying
amount, record the loss (para. 2022).
The excess of the fair value of the reporting unit over the fair value assigned
to all its assets (including unrecorded intangible assets) and liabilities is
equal to the implied fair value of goodwill (para. 21).
Subsidiary goodwill must be tested using the subsidiarys reporting units
When goodwill is embedded in
an equity method investment, the investment is tested for impairment under APB
18, para. 19h.
Write off the unamortized
balance of negative goodwill, and any negative goodwill embedded in an investment
carried under the equity method recorded before July 1, 2001, as an effect of
a change in accounting principle.
Taxes. Recompute deferred tax assets and liabilities related to impairment
losses, transition adjustments, and reclassifications (para. 41, 43, 49).
Reclassify intangible assets and goodwill to comply with SFASs 141 and 142. This
includes reclassifying certain intangibles to goodwill and separating certain
intangibles from goodwill, along with any related deferred taxes (SFAS 141, para.
61; SFAS 142, para. 49; EITF Topic D-100).
7. Transition: Intangibles.
Perform the transitional intangible asset impairment test in the first interim
period of SFAS 142 adoption. Any impairment loss is recorded as an effect
of a change in accounting principle.
8. Transition: Goodwill.
Perform the transitional goodwill impairment test. Any impairment loss is recorded
as an effect of a change in accounting principle. Step one of the
test must done within six months of the initial adoption of FASB 142. Step two
must be done before the end of the year of initial application of FASB 142.
disclosures (para. 6061).
the detailed financial statement disclosures, including the adjusted earnings
and adjusted earnings per share disclosures (para. 4247; Appendix C).
Public companies must make SAB 74 (SAB Topic 11M) disclosures.
New developments. Continue to monitor ongoing developments from the FASB,
EITF, and SEC.
N. Waxman, CPA, is managing director, Corporate Finance Advisory, New York
H. Colson, PhD, CPA
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