Snapshot Accounting for the impairment of goodwill and othe.docx

Snapshot: Accounting for the impairment
of goodwill and other long-lived assets
December 2012
Accounting for the impairment of goodwill and other long-lived
assets is complex because there are different models depending
on the type of asset involved. Each model uses a different unit
of account and each has a different impairment recognition
threshold. The frequency with which impairment must be
assessed and the basis used to measure an impairment charge
varies
across some of these models. To help with this complexity, we
have prepared a snapshot of the relevant accounting guidance in
the Financial Accounting Standards Board’s (FASB) Accounting
Standards Codification (ASC). Additional explanations for
certain
concepts in the snapshot are provided in the numbered notes
that follow it.
Indefinite-lived
intangible assets
Long-lived assets to be
held and used1
Goodwill

Long-lived assets to be
disposed of by sale
Codification topic ASC 350 ASC 360 ASC 350 ASC 360
Frequency Annual test is required,
and interim test is
necessary if triggers
are present
Test is required only if
triggers are present
Annual test is required,
and interim test is
necessary if triggers
are present
Test is required if held-for-
sale criteria are met
Unit of account In general,
individual asset 2
Asset group 3 Reporting unit 4 Individual asset to be
disposed of or a group
of assets to be disposed
of (i.e., disposal group)
Evaluated for
impairment before unit
of account
Not applicable Indefinite-lived
intangible assets and

other assets within the
asset group 5
Indefinite-lived
intangible assets,
long-lived assets to
be held and used and
other assets within the
reporting unit 5
Indefinite-lived
intangible assets,
goodwill and other
assets within the
disposal group 5
Single- or
multi-step test
Single-step 6 Multi-step Multi-step Single-step
Impairment
recognition
When the carrying
amount is greater than
fair value 6
When the carrying
amount is greater than
both the undiscounted
cash flows (recoverability
test) and fair value 7,8
When the carrying
amount of the reporting

unit (unless the carrying
amount is zero or
negative) is greater than
its fair value (Step 1) and
the carrying amount of
goodwill is greater than
its implied fair value
(Step 2) 9-11
When the carrying
amount is greater
than fair value less
costs to sell
Measurement The excess of the carrying
amount over fair value
The excess of the carrying
amount over fair value 8,12
The excess of the carrying
amount of goodwill over
its implied fair value 10
The excess of the
carrying amount
over fair value less
costs to sell
Assurance
Services
1. The types of assets covered by the caption “long-lived

assets to be held and used” include those long-lived assets
within the scope of ASC 360-10-15, such as property, plant
and equipment, assets under capital leases, amortizable
intangible assets, internal use software and long-term
prepaid assets.
2. In rare cases, the unit of account may be a combined group
of separately-recorded indefinite-lived intangible assets
that are essentially inseparable from one another.
3. The Master Glossary of the Codification defines an asset
group as “the lowest level for which identifiable cash flows
are largely independent of the cash flows of other groups
of assets and liabilities.” An asset group almost always
includes multiple assets. In other words, an asset group is
rarely a single asset.
4. The Master Glossary of the Codification defines a reporting
unit as “an operating segment or one level below an
operating segment (also known as a component)” (see
Note 13 for additional information). A reporting unit is not

the same as a reportable segment.
5. Other assets for this purpose might include accounts
receivable, inventory and equity-method investments.
6. FASB Accounting Standards Update (ASU) 2012-02,
Intangibles – Goodwill and Other (Topic 350): Testing
Indefinite-Lived Intangible Assets for Impairment, was
issued in July 2012 and is effective for annual and interim
impairment tests of indefinite-lived intangible assets
performed in fiscal years beginning after September
15, 2012. Prior to the effective date of ASU 2012-02, the
testing of indefinite-lived intangible assets for impairment
consists of a quantitative assessment of whether the
carrying amount of an indefinite-lived intangible asset is
greater than its fair value. After the effective date of ASU
2012-02, an entity can choose whether to first perform a
qualitative assessment of whether it is more likely than not
(a likelihood of more than 50 percent) that the indefinite-
lived intangible asset is impaired. Factors that should be

considered in performing the qualitative assessment are
included in ASC 350-30-35-18B (which was added by the
ASU). If the qualitative assessment shows that it is more
likely than not that the indefinite-lived intangible asset
is impaired, then the quantitative assessment must be
performed. Otherwise, the indefinite-lived intangible asset
impairment test is complete. Early adoption of ASU 2012-02
is permitted in certain situations.
7. An entity should not skip or disregard the comparison of
the asset group’s carrying amount and undiscounted cash
flows (i.e., the recoverability test). In other words, an entity
should not recognize an impairment charge for the excess
of the asset group’s carrying amount over its fair value if it
passes the recoverability test (i.e., the asset group’s carrying
amount is less than its undiscounted cash flows).
8. An asset group’s undiscounted cash flows and fair value will
be different amounts. Undiscounted cash flows do not take
the time value of money into consideration, whereas fair

value does take the time value of money into consideration.
In addition, undiscounted cash flows are estimated using
an entity-specific perspective while fair value is estimated
using a market-participant perspective.
9. An entity can choose whether to first perform a qualitative
assessment of whether it is more likely than not (a
likelihood of more than 50 percent) that the fair value
of a reporting unit is less than its carrying amount. If the
qualitative assessment shows that it is more likely than not
that the fair value of a reporting unit is less than its carrying
amount, then the entity must perform a quantitative
assessment of whether the carrying amount of the
reporting unit is greater than its fair value. If the qualitative
assessment shows that it is not more likely than not that
the fair value of a reporting unit is less than its carrying
amount, then the goodwill impairment test is complete.
10. The implied fair value of goodwill is determined in the
same manner as the amount of goodwill is determined

in the accounting for a business combination. An entity
measures the assets and liabilities in the reporting
unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business
combination, which results in the vast majority of the assets
and liabilities being measured at their fair values.
The excess, if any, of the fair value of a reporting unit
over the net sum of the fair values (and other measured
amounts) of the assets and liabilities in the reporting unit is
the implied fair value of goodwill.
11. If the carrying amount of a reporting unit is zero or
negative, then an impairment charge is recognized when
a qualitative assessment results in an entity concluding it
is more-likely-than-not that a goodwill impairment exists
(Step 1) and when the carrying amount of goodwill is
greater than its implied fair value (Step 2).

12. The impairment charge is allocated to the long-lived assets
in the asset group on a pro rata basis using the relative
carrying amounts of the assets. However, if the fair value
of a long-lived asset is determinable without undue cost
and effort, the carrying amount of that asset should not be
reduced below its fair value. Any unallocated loss as a result
of this limitation should be allocated to the other long-
lived assets in the asset group on a pro rata basis using the
relative adjusted carrying amounts of those assets.
13. The Master Glossary of the Codification defines an
operating segment as “a component of a public entity”
and refers to FASB ASC 280-10-50 for additional guidance
on what constitutes an operating segment. While the
definition refers to a public entity, this guidance is equally
applicable to a private entity when identifying reporting
units for purposes of its goodwill impairment testing. Based
on the guidance in FASB ASC 280-10-50, an operating
segment is a component of a public entity if it possesses all

of the following characteristics: (a) it engages in business
activities from which it may earn revenue and incur
expenses (including those resulting from intercompany
transactions), (b) its operating results are regularly reviewed
by the chief operating decision maker to make decisions
about resources to be allocated to the segment and assess
its performance and (c) its discrete financial information
is available. An operating segment is not the same as a
reportable segment.
Once operating segments are determined, they become the
starting point for determining reporting units. A reporting
unit will either be the same as the operating segment or
one level below it (a component of an operating segment)
but can never be on a more consolidated basis than the
operating segment. A component of an operating segment
must meet all of the following criteria to be considered
a reporting unit: (a) it constitutes a business, (b) its
discrete financial information is available and (c) segment

management regularly reviews its operating results.
The following McGladrey materials relating to the concepts
discussed in this paper can be found at
www.mcgladrey.com/assurance/accounting-resources
or by clicking on the links below:
• Qualitative impairment assessment of indefinite-lived
intangible assets
• FASB issues final standard on qualitative goodwill
impairment assessment
• Assigning assets and liabilities that relate to multiple
reporting units when testing goodwill for impairment
• Determination of reporting units when testing goodwill
for impairment
• Impairment testing of long-lived assets classified as
held and used
• A guide to accounting for business combinations –
second edition
800.274.3978
www.mcgladrey.com

Snapshot: Accounting for the impairment of goodwill and other
long-lived
assets is provided as an information service by McGladrey and
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http://mcgladrey.com/Accounting-Publications/Qualitative-
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http://mcgladrey.com/Assurance/FASB-Issues-Final-Standard-
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EditionSL2219194-109575SL2193441-108762

September 23, 2011
Although the accounting literature for the impairment of long-
lived assets other than
goodwill has not significantly changed in many years, we
recently have encountered
practice issues in the application of this guidance. In particular,
issues have arisen in
the impairment testing of long-lived assets that are classified as
held and used, which
is a multi-step process that often can be complex.
Introduction
FASB Accounting Standards Codification (ASC) Topic 360,
Property, Plant and
Equipment, provides guidance for the impairment of long-lived
assets that are
classified as held and used. In particular, the relevant guidance
is included in the
“Impairment or Disposal of Long-Lived Asset” subsections of
ASC Subtopic 360-10.
This guidance requires the following multi-step approach to
impairment testing:
1. Consider whether indicators of impairment are present for the
asset group;
2. If indicators of impairment are present that indicate the
carrying amount of the
asset group may not be recoverable, determine whether the
carrying amount of
the asset group is recoverable, based on a comparison of the
total undiscounted
future cash flows from the asset group to the carrying amount of
the asset group;

and
3. If the carrying amount of the asset group is not recoverable,
an impairment loss
should be measured based on the excess of the carrying amount
of the asset
group over the fair value of the asset group.
This guidance is applicable to all long-lived assets subject to
amortization that are
classified as held and used, regardless of whether they are
tangible or intangible
assets. Assets that are subject to this guidance include property
and equipment;
assets acquired under capital leases; long-term prepaid assets;
and finite-lived
intangible assets. This paper is intended to address the guidance
for testing these
long-lived assets for impairment and certain issues that have
arisen in practice.
Impairment Testing of Long-Lived Assets
Classified as Held and Used
2
Asset Group Determination
An asset group is the unit of accounting for long-lived assets
classified as held and

used and therefore must be identified prior to the impairment
testing. As discussed
in ASC 360-10-35-23, an asset group is the grouping of assets
and liabilities that
represents the lowest level of identifiable cash flows that are
largely independent of
the cash flows of other groups of assets and liabilities. If the
lowest level of
identifiable cash flows depends on cash flows generated by
other assets, the asset
group should be established at a higher level. By its nature, the
determination of
asset groups is very judgmental and will depend on the specific
facts and
circumstances. The intent of this grouping of assets is for
testing to be performed at
a relatively low level of an entity. Some examples of common
asset groupings
include those assets that are part of an individual production
line, manufacturing
plant, or retail store. In certain limited situations, a long-lived
asset (such as a
corporate headquarters) may not have identifiable cash flows
that are largely
independent of the cash flows of any other asset groups, in
which case the asset
group for that long-lived asset would include all assets and
liabilities of the entity.
In most cases, an asset group will consist of assets in addition
to the long-lived
asset being evaluated for impairment. This is because most
long-lived assets do
not generate cash flows without other complementary assets.
Because the unit of
accounting for evaluating long-lived assets for impairment is

based on the
identifiable cash flows generated, any long-lived asset that does
not generate its
own cash flows cannot be considered the unit of accounting
(i.e., asset group) by
itself. For example, a customer relationship intangible asset
does not generate
cash flows without other assets, such as the finished goods
inventory that will be
sold to the customer, the equipment that will be used to
manufacture the raw
materials into finished goods, and working capital. This often is
misunderstood, and
entities may initially perform testing on the individual long-
lived asset rather than
the asset group. Generally, this is because entities determine the
fair value of an
individual long-lived asset in certain other circumstances, such
as when applying
the acquisition method in a business combination. Therefore,
they may incorrectly
believe the long-lived asset itself is the appropriate level for
impairment testing.
We also have seen circumstances in which entities had initially
determined asset
groups based on their operating segments or reporting units
used for goodwill
impairment testing. While these may be the same in some cases,
the determination
of asset groups must be made based on the definition of an asset
group rather than
an entity’s operating segments or reporting units.
Impairment Indicators
Long-lived assets only are required to be tested for impairment

if events or changes
in circumstances indicate the carrying amount of the asset group
to which they
belong may not be recoverable. Existing information and
analyses developed for
management review of the entity’s operations often will include
the primary evidence
3
needed to determine when impairment potentially exists. As
discussed in ASC 360-
10-35-21, examples of these types of events or changes in
circumstances include the
following:
• A significant decrease in the market price of a long-lived asset
group.
• A significant adverse change in the extent or manner in which
a long-lived asset
group is being used or in its physical condition. For example, a
restructuring that
results in a significant reduction in a plant's output.
• A significant adverse change in legal factors or in the business
climate that could
affect the value of a long-lived asset group, including an
adverse action or

assessment by a regulator. For example, a new law that affects
the entity's
ability to utilize its facilities or sell its products, a significant
new competitor
entering the market, or certain assets becoming subject to
environmental clean-
up laws.
• An accumulation of costs significantly in excess of the amount
originally expected
for the acquisition or construction of a long-lived asset group.
For example,
significant cost overruns on the construction of a new plant.
• A current-period operating or cash flow loss combined with a
history of operating
or cash flow losses or a projection or forecast that demonstrates
continuing
losses associated with the use of a long-lived asset group.
• A current expectation that, more likely than not, a long-lived
asset group will be
sold or otherwise disposed of significantly before the end of its
previously
estimated useful life.
These examples are not all-inclusive, and entities also should
evaluate whether other
events or changes in circumstances have occurred that could
indicate the carrying
amount of the asset group is not recoverable. For example,
events or changes in
circumstances such as evidence of a physical defect in a long-
lived asset included
within an asset group, impairment of other assets included
within an asset group,

major order cancellations or changes in the technological
environment also may be
indicators of impairment. If indicators of impairment are
present that indicate the
carrying amount of the asset group may not be recoverable, an
entity must move on
to the next step of the test to determine whether the carrying
amount of the asset
group is recoverable.
Recoverability of the Carrying Amount of an Asset Group
The carrying amount of an asset group is considered recoverable
if the total
undiscounted future cash flows from the asset group are greater
than the carrying
amount of the asset group. The carrying amount of an asset
group should be
determined based on the aggregate of the carrying amounts of
the assets included in
the asset group. These carrying amounts (other than goodwill)
should be adjusted
based on other applicable GAAP prior to testing the asset group
for recoverability.
Goodwill would only be included in an asset group if the group
is or includes the
related reporting unit with goodwill. The carrying amount of
any goodwill included in
4

an asset group should not be adjusted for potential goodwill
impairment prior to
testing the asset group for recoverability. Furthermore, debt is
generally not included
in an asset group as the cash outflows for debt are generally
separately identifiable
from other cash flows.
As discussed in paragraphs 29 and 30 of ASC 360-10-35, the
total undiscounted
cash flows used to compare to the carrying amount of the asset
group should include
only the future cash flows that are directly associated with and
that are expected to
arise as a direct result of the use of the asset group and its
eventual disposition (i.e.,
future cash inflows expected to be generated by an asset group
less the future cash
outflows expected to be necessary to obtain those inflows).
These cash flow
estimates should exclude cash outflows for interest and
generally should be
determined on a pre-tax basis.
The assumptions used in developing these estimates must be
based on the entity’s
intended use of the asset group (i.e., entity-specific) and should
represent
management's best estimates of the future outcomes. If an
entity has a reasonable
basis to assume that prices or volumes will increase from
existing levels, it is
appropriate to include these increases in the cash flow
estimates. For example, if an
asset group includes a group of acquired customer relationships,

the estimated cash
flows should include both those from acquired customers as
well as new customers.
However, cash flow estimates should only include those
amounts that can be
generated based on the asset group’s existing potential or
capacity exclusive of
additional capital expenditures. As a result, any volume
increases an entity includes
in its estimated cash flows would be limited to those volumes
that can be produced
with the asset group’s existing potential or capacity.
Furthermore, cash flows for
items such as repairs and maintenance to maintain an asset
group’s existing
potential or capacity should be included as part of the asset
group’s cash outflows.
The estimates may be a point estimate of the most likely
outcome or a range of
possible outcomes. If a range of possible outcomes is used, the
probability of each
possible outcome should be considered. Furthermore, these
assumptions must be
reasonable as compared with the assumptions used in
developing other information
used by the entity for comparable periods, such as internal
budgets and projections,
accruals related to incentive compensation plans, or information
communicated to
others such as lenders, management, or the board of directors.
As discussed in paragraphs 31 and 32 of ASC 360-10-35, the
time period for
estimating cash flows from the use of an asset group generally
should be based on

the remaining useful life of the primary asset of the group to the
entity. The primary
asset of an asset group cannot be land or an intangible asset not
being amortized.
Factors that an entity generally should consider in determining
the primary asset of
an asset group include the following:
• Whether other assets of the group would have been acquired
by the entity
without the asset,
5
• The level of investment that would be required to replace the
asset, and
• The remaining useful life of the asset relative to other assets
of the group.
In addition to the estimated cash flows from the use of an asset
group during the
primary asset’s remaining useful life, the estimated cash flows
from the eventual
disposition of the asset group also must be considered. If the
primary asset is not the
asset of the group with the longest remaining useful life,
estimates of future cash
flows for the group should assume the sale of the group at the

end of the useful life of
the primary asset. Furthermore, if the asset group meets the
definition of a business,
the cash inflows from the sale of that business at the end of the
primary asset’s
useful life would need to be estimated. When estimating these
cash inflows certain
fair value principles may need to be considered, such as a
discounted cash flow
technique or other fair value techniques, adjusted to exclude
any growth beyond an
asset group’s existing potential or capacity as noted previously.
If the undiscounted cash flows from the use and disposition of
the asset group are
greater than its carrying amount, the asset group’s carrying
amount is considered
recoverable and therefore is not impaired. This is the case even
if the fair value of the
asset group, or the individual long-lived asset within the asset
group, is less than its
carrying amount, which often is misunderstood in practice.
While there would be no
impairment in these situations, consideration should be given to
adjusting the useful
lives of the long-lived assets for depreciation or amortization
purposes as
appropriate. If the undiscounted cash flows from the asset group
are less than its
carrying amount, the asset group is considered to be impaired
and the fair value of
the asset group must be determined in the next step of the
impairment test and
compared to its carrying amount to determine the impairment
loss.

Fair Value of an Asset Group
The fair value of an asset group must be determined based on
the guidance in ASC
Topic 820, Fair Value Measurements and Disclosures, which
states that fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an
orderly transaction between market participants at the
measurement date. As
discussed in ASC 360-10-35-36, an expected present value
technique often will be
used to estimate the fair value of an asset group. Because the
determination of fair
value is based on market participant assumptions, the estimated
cash flows used in
an expected present value technique may differ from those used
in the recoverability
test as those cash flows were determined using entity-specific
assumptions. This
potential difference in cash flows often can be overlooked.
Another issue that comes up in practice is that entities may
improperly determine the
fair value of an individual long-lived asset within an asset
group in this step of the
impairment test, rather than the fair value of the asset group as
a whole. This may
occur because entities often determine the fair value of an
individual long-lived asset
in certain other circumstances, such as when applying the
acquisition method in a
business combination, as noted previously.

6
If the fair value of the asset group is less than its carrying
amount, the excess of the
carrying amount above the fair value generally should be
recognized as an
impairment loss. The adjusted carrying amount of a long-lived
asset that is impaired
should be its new cost basis, which should be depreciated
(amortized) over the
remaining useful life of that asset.
Allocation of Impairment Loss
As discussed in ASC 360-10-35-28, any impairment loss for an
asset group should
reduce only the carrying amounts of the long-lived assets of the
asset group. The
loss should be allocated to the long-lived assets of the group on
a pro rata basis
using the relative carrying amounts of those assets, except that
the loss allocated to
an individual long-lived asset of the group should not reduce
the carrying amount of
that asset below its fair value whenever that fair value is
determinable without undue
cost and effort.
The following example from paragraphs 21 and 22 of ASC 360-
10-55 illustrates the
allocation of an impairment loss to the long-lived assets of an
asset group:

An entity owns a manufacturing facility that together with other
assets is tested for
recoverability as a group. In addition to long-lived assets
(Assets A-D), the asset
group includes inventory, which is reported at the lower of cost
or market, and other
current assets and liabilities that are not covered by ASC 360-
10. The $2.75 million
aggregate carrying amount of the asset group is not recoverable
and exceeds its fair
value by $600,000. In accordance with ASC 360-10-35-28, the
impairment loss of
$600,000 would be allocated as shown below to the long-lived
assets of the group.
Asset Group
Carrying
Amount
(in $ 000s)
Pro Rata
Allocation
Factor
Allocation of
Impairment
(Loss)
(in $ 000s)
Adjusted
Carrying
Amount

(in $ 000s)
Current assets $ 400 - $ - $ 400
Liabilities
Long-lived assets
(150) - - (150)
Asset A 590 24% (144) 446
Asset B 780 31 (186) 594
Asset C 950 38 (228) 722
Asset D 180 7 (42) 138
Subtotal - long-
lived assets 2,500 100 (600) 1,900
Total $ 2,750 100% $ (600) $ 2,150
If the fair value of an individual long-lived asset of an asset
group is determinable
without undue cost and effort and exceeds the adjusted carrying
amount of that asset
after an impairment loss is allocated initially, the excess
impairment loss initially
allocated to that asset would be reallocated to the other long-
lived assets of the
7

group. For example, if the fair value of Asset C is $822,000, the
excess impairment
loss of $100,000 initially allocated to that asset (based on its
adjusted carrying
amount of $722,000) would be reallocated as shown below to
the other long-lived
assets of the group on a pro rata basis using the relative
adjusted carrying amounts
of those assets.
Long-Lived
Assets of
Asset Group
Adjusted
Carrying
Amount
(in $ 000s)
Pro Rata
Re-Allocation
Factor (%)
Reallocation of
Excess
Impairment
(Loss) (in $ 000s)
Adjusted Carrying
Amount After
Reallocation
(in $ 000s)

Asset A $ 446 38% $ (38) $ 408
Asset B 594 50 (50) 544
Asset D 138 12 (12) 126
Subtotal 1,178 100% (100) 1,078
Asset C 722 100 822
Total - long-
lived assets $ 1,900 $ - $ 1,900
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Your firm is Barrett & Blackstone LLP.
The following table presents management’s estimate of future
cash flows from each of the possible courses of action.
A. Continue operating the ship in the current area.
B. Operate the ship in a new pirate-free area.
C. Operate the ship in the current area through December 31,
2015 then turn the ship over to the lender (have the lender
foreclose on the ship).
Estimated Future Cash Inflows – Undiscounted
(in $ millions)
Option
Probability of Occurring
2016

2017
2018
2019
2020
Total
Probability
Weighted
A
10%
$1.0
$.9
$.7
$.7
$.7
$4.0
B
20%
.6
.8
1.1
1.6
1.9
6.0
C
70%
$1.0
$3.0[footnoteRef:1] [1: Includes the ship’s FMV of $3 million
treated as forgiveness of debt associated with the foreclosure up
to FMV of the asset.]
$0
$0
$0
$4.0

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