Tue, Mar 14, 2017
The Financial Accounting Standards Board (“FASB”) in the U.S. has issued a few Accounting Standard Updates (“ASUs”) over the past several months that could impact various areas of accounting such as acquisitions, disposals, goodwill impairment and consolidation under U.S. GAAP; this, in turn, may affect a company’s valuation requirements. In the following sections, we have summarized the key features and potential valuation impact from two FASB updates:
FASB Simplifies the Goodwill Impairment Test by Eliminating Step 2 under ASC 350
In January 2017, FASB issued ASU 2017-04 which eliminates Step 2 of the current goodwill impairment test under ASC 350. Under the simplified model, a goodwill impairment is calculated as the difference between the carrying amount of the reporting unit and its fair value, but not to exceed the carrying amount of goodwill allocated to that reporting unit.
Additionally, there are three notable changes:
Step 0 was introduced in September 2011 when the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, providing public and private companies with the option to first assess qualitative factors to determine whether it is "more likely than not" (i.e., greater than a 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, inclusive of goodwill. In evaluating this likelihood, an entity is to assess certain events and circumstances, including but not limited to macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, entity-specific events, a sustained decrease in share price (if applicable), etc.
What is the Impact?
Who is affected?
When is it effective?
Click here to read the full ASU.
FASB Revises the Definition of a "Business" under ASC 805
Earlier this year, FASB issued ASU 2017-01 which clarifies the definition of a business and introduces a framework for determining when a set of assets and activities constitutes a business. In general, the definition of a business has a significant impact on how an entity treats acquisitions and disposals of an asset (or group of assets), and how it accounts for goodwill and consolidation.
The new guidance includes an initial screen, which specifies that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset (or a group of similar identifiable assets), the set is not a business, and no further assessment is required.
If the initial screen is not met, to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. On the other hand, the ASU removes the evaluation of whether a market participant could replace missing elements. In essence, this ASU lays out a framework for evaluating whether both an input and a substantive process are present, while introducing more stringent criteria for sets without outputs. Finally, the ASU narrows the definition of the term ‘output’ so that it is consistent with how outputs are described in Topic 606 – Revenue from Contracts with Customers.
The IASB has added a project on the definition of a business to its agenda under IFRS and issued an Exposure Draft, Definition of a Business and Accounting for Previously Held Interests – Proposed amendments to IFRS 3 and IFRS 11, which proposes similar amendments to those in ASU 2017-01. However, this project is not yet complete, and as such, there is no change in the current application of the definition of a business under IFRS.
What is the Impact?
Who is Affected?
When is it Effective?
Click here to read the full ASU, with examples for various industries.
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