November 1, 2014

Take an Accounting Quiz on Goodwill

True or False:

The FASB requires an entity to test goodwill (indefinite-lived intangible assets) for impairment at least annually, by using a quantitative approach by comparing the fair value of the assets with its carrying amount.
False. In accordance with ASC 2012-02 (Intangibles-goodwill and other), an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.  If, after an entity assesses the qualitative factors and determines that an entity is not more likely than not that the indefinite lived intangible asset is impaired, then the entity is not required to take further action.  However, if an entity concludes otherwise, then it is required to determine the fair value by performing a quantitative approach.

An entity is not required to document their qualitative assessment on goodwill impairment.
False. Even though the entity is allowed to perform a qualitative assessment before performing a quantitative assessment on goodwill impairment.  Management is required to document their qualitative assessment and have written support for their assessment.

The FASB has approved an amendment that will allow all companies to be able to amortize goodwill for 10 years or less.
False. The FASB approved the amendment proposed by The Private Company Council (PCC) to allow all entities except for public business entities and not-for-profit entities (therefore not effective for all companies) to elect an alternative method for amortizing goodwill.  An entity that meets the criteria above may elect the alternative method which will allow goodwill to be amortized on a straight line basis for 10 years or less, if an entity can demonstrate that another useful life is more appropriate.  The alternative method will allow clients to test goodwill only when a triggering event occurs.  You should contact your accountants if you are considering an election of the alternative method since this may be a method that may not meet your needs and there will also be various disclosure requirements.  The amendment will be effective for periods beginning after December 15, 2014.

Information from this Article with respect to development stage entities and discontinued operations was derived from the FASB accounting standard updates.