A reporting unit carries goodwill among its net assets. At the annual testing date, management performs a qualitative assessment of relevant events and circumstances — industry and macroeconomic conditions, the reporting unit's own financial performance, and other factors — and concludes it is not more likely than not that the reporting unit's fair value is less than its carrying amount. Under ASC 350-20-35-3A, is the company still required to perform the quantitative goodwill impairment test comparing the reporting unit's fair value to its carrying amount this year?
- No — the qualitative assessment is optional, but once performed and concluding that impairment is not more likely than not, it allows the company to bypass the quantitative test for that reporting unit for that period
- Yes, the qualitative assessment is only a preliminary screen, and the quantitative test must still be performed every year regardless of its conclusion
- No, but only if the company also performed and passed the same qualitative assessment in each of the two preceding years
- Yes, unless the reporting unit's goodwill balance falls below a de minimis dollar threshold set by the FASB, in which case testing is waived entirely
Why A? And why not the others?
Correct answer: A. No — the qualitative assessment is optional, but once performed and concluding that impairment is not more likely than not, it allows the company to bypass the quantitative test for that reporting unit for that period
ASC 350-20-35-3A gives an entity the option, for any reporting unit in any period, to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than fifty percent) that a reporting unit's fair value is less than its carrying amount. If that qualitative assessment concludes it is not more likely than not, the entity may stop there and is not required to perform the quantitative fair-value-to-carrying-amount comparison for that reporting unit that period. This qualitative bypass is unconditional and available in any period regardless of whether the entity used the quantitative test in a prior year, and it can be resumed or dropped from year to year. The option requiring the quantitative test every year regardless of the qualitative conclusion contradicts the entire purpose of the qualitative screen, which exists precisely to let a company skip the quantitative test when warranted. The option requiring two consecutive prior years of passing the qualitative assessment invents a track-record condition that does not appear anywhere in ASC 350-20. The option waiving testing below a FASB-set dollar threshold is fabricated; no such de minimis exemption exists — the standard's mechanism is the qualitative-factors assessment, not a dollar-based waiver.
Source: FASB ASC 350-20-35-3A (optional qualitative assessment for goodwill impairment testing)