A reporting unit has a carrying amount, including goodwill, of $9 million. Management skips the optional qualitative assessment and performs the quantitative goodwill impairment test, determining the reporting unit's fair value is $7.5 million. The reporting unit's goodwill balance is $3 million. Under the current ASC 350-20 goodwill impairment test as amended by ASU 2017-04, what impairment loss should be recognized?
- $1.5 million — the excess of the reporting unit's carrying amount over its fair value, recognized as a goodwill impairment loss because it does not exceed the $3 million goodwill balance
- $3 million — the entire goodwill balance must be written off whenever fair value is less than carrying amount, regardless of the size of the shortfall
- $0 — a hypothetical purchase price allocation must first be performed to determine the implied fair value of goodwill before any loss can be recognized
- $1.5 million, but recognized as a direct reduction to retained earnings rather than as a component of income from continuing operations
Why A? And why not the others?
Correct answer: A. $1.5 million — the excess of the reporting unit's carrying amount over its fair value, recognized as a goodwill impairment loss because it does not exceed the $3 million goodwill balance
ASU 2017-04 replaced the old two-step goodwill impairment test in ASC 350-20 with a single-step test: the impairment loss equals the amount by which the reporting unit's carrying amount exceeds its fair value, capped at the total goodwill allocated to that unit. Here the shortfall is $9 million minus $7.5 million, or $1.5 million, which is less than the $3 million goodwill balance, so the loss recognized is $1.5 million rather than a full write-off. Option B overstates the loss by ignoring the excess-of-carrying-over-fair-value measurement; a full write-off of goodwill would only be correct if the shortfall equaled or exceeded the goodwill balance. Option C describes the old Step 2 hypothetical purchase price allocation that ASU 2017-04 eliminated. Option D is wrong because a goodwill impairment loss is recognized in operating income as part of continuing operations, not as a direct adjustment to equity.
Source: FASB ASC 350-20-35 as amended by ASU 2017-04 (Simplifying the Test for Goodwill Impairment)