Testing Goodwill for Impairment: Overview and Implications of Recent Changes to ASC

Transcription

1 Testing Goodwill for Impairment: Overview and Implications of Recent Changes to ASC

2 Module 1: Course introduction

3 Agenda Course overview Overview of changes to guidance Case study Observations and action plan Q&A Wrap up 2011 Deloitte Global Services Limited. 3

4 Objectives Identify and describe changes to the goodwill impairment guidance. Discuss accounting and auditing implications. Discuss professional judgment and professional skepticism issues to consider related to the updated guidance. Anticipate and prepare for key conversations with the entity related to the changes. Examine and practice accounting and audit implications in case scenario Deloitte Global Services Limited. 4

5 Module 2: Overview of changes to the guidance on testing goodwill for impairment

6 Background and purpose of the update Background for FASB decision o In December 2010, the FASB added a project to its agenda to develop an alternative to the current goodwill impairment assessment guidance. o Project was in response to concerns raised by preparers for nonpublic entities over the cost and complexity of performing step one of the goodwill impairment process. Purpose o It gives entities the option of performing a qualitative assessment of whether the fair value of a reporting unit is more-likely-than-not less than the carrying amount Deloitte Global Services Limited. 6

7 Effective date and transition Amendments are effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, Early adoption is permitted Deloitte Global Services Limited. 7

8 Scope Applies to all entities, both public and nonpublic, that have goodwill recorded on their balance sheet Does not amend the annual testing requirements for other indefinite lived intangible assets 2011 Deloitte Global Services Limited. 8

9 Main provisions Change #1 Option of performing a qualitative assessment before calculating fair value of the reporting unit Based on qualitative factors, is it more-likely-than-not that the fair value of the reporting unit is less than the carrying amount? This Step is OPTIONAL! Yes No Step 1: Is the fair value of the reporting unit less than its carrying amount, including goodwill? No Yes Step 2: Determine the implied fair value of goodwill and compare to the carrying amount to determine whether goodwill is impaired No further testing required 2011 Deloitte Global Services Limited. 9

10 Main provisions Change #2 List of qualitative assessment factors Macroeconomic conditions Industry and market considerations Increases in raw materials, labor, or other costs that have a negative effect on earnings Overall financial performance Entity-specific events Events affecting a reporting unit If applicable, a sustained decrease (both absolute and relative to its peers) in share price The qualitative factors listed above also apply to interim testing Deloitte Global Services Limited. 10

11 Main provisions Change #2 List of qualitative factors (continued) Entities should take the following into account when considering qualitative factors: o Significance and adversity of each factor relative to fair value of reporting unit o Positive factors and mitigating circumstances that may affect analysis o If the entity has a recent fair value calculation for the reporting unit, whether the fair value of the reporting unit exceeded its carrying amount by a substantial margin o Factors in their totality no factor is meant to be determinative or trigger an impairment test on its own o Qualitative factors are not all-inclusive 2011 Deloitte Global Services Limited. 11

12 Main provisions Change #3 Carryforward option removed ASC currently allows entities to carryforward a detailed calculation of the fair value of the reporting unit if certain conditions are met. 1. The assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination. (A recent significant acquisition or a reorganization of an entity's segment reporting structure is an example of an event that might significantly change the composition of a reporting unit.) 2. The most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin. 3. Based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote. Entities currently using this option would now need to perform a qualitative assessment or move straight to the quantitative Step 1 calculation Deloitte Global Services Limited. 12

13 Areas of no change Step 1 and Step 2 of Goodwill Impairments test How goodwill is calculated or assigned to reporting units Requirement to test goodwill annually for impairment Requirement to test goodwill for impairment between annual tests if events or circumstances warrant Current guidance for testing other indefinitelived intangible assets for impairment Goodwill impairment analysis under IFRS 2011 Deloitte Global Services Limited. 13

14 Module 3: Galaxy Sports case study

15 Case study: Galaxy Sports Read handout 1, Galaxy Sports case study Discuss the case study discussion question #1 with your table team Prepare your response for debriefing Team Table discussions Discussion question #1 20 minutes Discussion question #1 debrief 10 minutes 2011 Deloitte Global Services Limited. 15

16 Case study: Galaxy Sports discussion question #1 Team 1. Do you believe management has appropriately supported its assertion that it is more-likely-than-not that the fair value of each reporting unit is greater than the carrying amount? Why or why not? What additional analysis or supporting documentation, if any, would you request from management to support their assertions? Consider the qualitative factors both generally and individually and in their totality, as outlined in the memo. Table discussions Discussion question #1-20 minutes 2011 Deloitte Global Services Limited. 16

17 Case study: Galaxy Sports discussion question #1 debrief Team Summarize and present your team s findings 1. Do you believe management has appropriately supported its assertion that it is more-likely-than-not that the fair value of each reporting unit is greater than the carrying amount? Why or why not? What additional analysis or supporting documentation, if any, would you request from management to support their assertions? Consider both generally and the qualitative factors, individually and in their totality, as outlined in the memo. Discussion question #1 debrief - 10 minutes 2011 Deloitte Global Services Limited. 17

18 Observations and action plan Discussion questions # What audit documentation might exist in other parts of the audit file that could be considered when evaluating the appropriateness of management s qualitative analysis? What audit practice aids and resources would you consider using when developing your professional judgments regarding management s qualitative analysis? 3. Do you believe conversations between engagement leadership and entity management will be needed in order to close any expectation gap that may exist between the extent of documentation management thinks is needed to support their qualitative assertions and what we may need from an audit perspective? 4. Do you think your clients will utilize the qualitative assessment? If so, what concerns do you have about the analysis they may prepare? Observations and action plan Discussion questions # minutes 2011 Deloitte Global Services Limited. 18

19 Module 4: Course wrap-up

20 Testing Goodwill for Impairment: Overview and Implications of Recent Changes to ASC Key learning points Understand the recent changes to testing for goodwill for impairment ASC and its implications. Apply new testing for goodwill for impairment ASC guidance. Have an action plan for implementing new guidance Deloitte Global Services Limited. 20

21 Questions? 2011 Deloitte Global Services Limited. 21

22 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. This publication is for internal distribution and use only among personnel of Deloitte Touche Tohmatsu Limited, its member firms, and its and their affiliates. None of Deloitte Touche Tohmatsu Limited, Deloitte Global Services Limited, Deloitte Global Services Holdings Limited, the Deloitte Touche Tohmatsu Verein, any of their member firms, or any of the foregoing s affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication Deloitte Touche Tohmatsu