The CPA Journal

ACCOUNTING

March 2002

Goodwill And Intangible Assets: A Ten-Step Program for Public and Nonpublic Entities

By Robert N. Waxman

Under 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.

Ten Steps

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.

2. Transition. Review the SFAS 142 effective and transition dates to determine when it applies to an entity (para. 48–59).

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. 12–15):

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. 11).
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. 16–17):

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 performed annually.
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.

4. Goodwill.

Determine the entity’s 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.
During each reporting period, review each of the specific events or circumstances that would require goodwill be tested (para. 28–29).
In addition to the events or circumstances test, the impairment test must be performed annually.
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. 20–22).
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 subsidiary’s reporting units (para. 37).
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.

5. Taxes. Recompute deferred tax assets and liabilities related to impairment losses, transition adjustments, and reclassifications (para. 41, 43, 49).

Classifications. 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.

9. Disclosures.

Prepare transitional disclosures (para. 60–61).
Prepare the detailed financial statement disclosures, including the adjusted earnings and adjusted earnings per share disclosures (para. 42–47; Appendix C).
Public companies must make SAB 74 (SAB Topic 11M) disclosures.

10. New developments. Continue to monitor ongoing developments from the FASB, EITF, and SEC.

Robert N. Waxman, CPA, is managing director, Corporate Finance Advisory, New York City.

Editor:
Robert H. Colson, PhD, CPA
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