The document discusses the FASB's new qualitative assessment option for assessing goodwill impairment that became effective in late 2011. It allows companies to first qualitatively assess factors such as macroeconomic conditions, industry trends, costs, financial performance, and entity-specific events to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step goodwill impairment test. The document provides examples of qualitative factors to consider and economic resources for researching trends to inform the assessment. It emphasizes properly documenting the assessment and notes that Decosimo advisors can assist with researching industry data and transaction multiples to aid the analysis.

1. A Global Reach with a Local Perspective
2012 DECOSIMO ACCOUNTING SEMINAR
www.decosimo.com
Step Zero: New Qualitative Assessment Allowed for Assessing Goodwill
SHANNON FARR, CPA, ABV, CFF
Valuation Manager, Decosimo Advisory Services

3. Who? Where?
Why?
What?
When?
Who? The Financial Accounting Standards Board (FASB)
What? Accounting Standards Update No. 2011-08, Testing Goodwill for
Impairment
When? Issued September 2011, effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after
December 15, 2011
Where? All entities, both public and nonpublic, that have goodwill
reported in their financial statements
Why? To address concerns “about the cost and complexity of
performing the first step of the two-step goodwill impairment test
required under ASC Topic 350”

4. An entity now has the option to first
assess qualitative factors to
determine whether the “existence of
events or circumstances leads to a
determination that it is more likely
than not that the fair value of a
reporting unit is less than its carrying
amount.”

5. The Step-Zero Impairment Assessment
 Qualitative factors for management to consider prior
to the performance of the two-step impairment test
include the following:
 Macroeconomic conditions
 Industry conditions
 Cost factors
 Overall financial performance
 Entity-specific events

6. The Step-Zero Impairment Assessment – cont’d
 If qualitative assessment indicates that “it is more
likely than not” that the fair value of a reporting unit
is less than its carrying amount,
the entity is required to proceed to Step 1 of the
goodwill impairment test
(“More likely than not” is defined as “a likelihood of
more than 50 percent”)

7. Macroeconomic Conditions
 A deterioration in general economic conditions
 Limitations on accessing capital
 Fluctuations in foreign exchange rates
 Other developments in equity and credit markets

8. General Economic Conditions?

9. National Economic Conditions
According to Decosimo’s National Economic Conditions:
In November 2011, the FOMC predicted that real GDP growth would have
a central tendency between 1.6% and 1.7%, between 2.5% and 2.9%, and
between 3.0% and 3.5% during 2011, 2012, and 2013, respectively. In its
longer run projection, the FOMC predicted that real GDP growth would
have a central tendency between 2.4% and 2.7% (consistent with its
previous longer-run projection).
The third quarter Philadelphia Federal Reserve Survey of Professional
Forecasters (the “Philly Survey”) predicts real GDP growth of 1.6%, 1.8%,
1.9%, and 2.1% (SAAR) for the fourth quarter of 2011 and the first, second
and third quarters of 2012, respectively. The Philly Survey further
predicts annual GDP growth of 2.0%, 2.1% during 2011 and 2012,
respectively.
The September Wall Street Journal Survey of Economic Forecasters (the
“WSJ Survey”) predicts growth rates of 2.1%, 2.1%, 2.4%, and 2.6%
(SAAR), for the fourth quarter of 2011 and the first, second, and third
quarters of 2012, respectively. The WSJ Survey projects GDP will
experience annual growth rates of 1.5% and 2.4% in 2011 and 2012,
respectively.

10. Other Economic Resources
 TENNESSEE BUSINESS AND ECONOMIC OUTLOOK,
Center for Business and Economic Research,
College of Business Administration, The University
of Tennessee, Knoxville, Tennessee
 Federal Reserve (various information available at
www.federalreserve.gov)
 U.S. Department of Commerce, Bureau of Economic
Analysis
 U.S. Census Bureau
 Local Chamber of Commerce websites

11. Industry Conditions
 a deterioration in the market in which an entity
operates
 increased competition
 a decline in market-dependent multiples or metrics
(absolute or relative)
 change in the market for the entity’s products or
services
 a regulatory or political development

12. Market Deterioration?

13. IBISWorld Revenue Growth Predictions
Industry Growth 06/07- Growth 11/12-
11/12 16/17
Chemical product manufacturing -1.9% 1.7%
Inorganic chemical manufacturing 2.2% 2.3%
Primary care physicians 2.2% 4.2%
Specialist physicians 2.8% 5.5%
Diagnostic and medical laboratories 2.0% 4.5%
Aluminum manufacturing -5.1% 4.7%
Wiring device manufacturing -3.2% 3.3%
Printing -5.5% -1.8%
Fast food restaurants -1.6% 2.0%
Natural gas distribution -2.1% 5.8%

14. Regulatory or Political Developments

15. Cost Factors
 increases in raw materials cost
 increased labor cost
 other significant cost increases

16. Production Cost Expectations?

17. Production Cost Trends
Average Annual Price of Crude Oil
% Growth Historical IBISWorld
$140 60%
$120 45%
Price pe r Barre l
$100 30%
Grow th
$80 15%
$60 0%
$40 -15%
$20 -30%
$0 -45%
2015*
2016*
2017*
2012*
2013*
2014*
2000
2001
2006
2007
2008
2009
2010
2002
2003
2004
2005
2011
Ye ar

18. Overall Financial Performance
 negative or declining cash flows
 a decline in actual or planned revenue or earnings
compared with actual and projected results of prior
periods

19. What’s Happening with EBITDA?

20. Entity-Specific Events
 changes in management or key personnel
 changes in strategy or customers
 contemplation of bankruptcy
 litigation issues, etc.

21. Realistic Assessment of the Effects of a Change in Strategy?

22. Other Relevant Events and Circumstances to
Consider
 A change in the composition or carrying amount of a
RU’s net assets
 An expectation of selling or disposing all, or a
portion of a reporting unit
 If applicable, a sustained decrease in share price
(absolute or relative)

23. Reaching a Conclusion
The desired result of the qualitative assessment is to
reach a conclusion as to whether it is more likely
than not that the fair value of a reporting unit is less
than its carrying amount.
To what extent could each of the adverse events or
circumstances identified affect the reporting unit’s
fair value or the carrying value of its net assets?

24. The End Result
If after assessing the totality of events and
circumstances described,
an entity decides
“it is not more likely than not”
that the fair value of a RU is less than its carrying
amount,
then the first and second steps of the goodwill
impairment test are unnecessary

25. Take Aways
 Qualitative assessment ≠ no assessment
 Document, document, document
 Many free resources are available to aid in the
assessment
 Decosimo advisors can help you research industry
trends, transaction multiples and guideline public
company multiples
 If a goodwill impairment test is necessary, Decosimo
provides that service (for our audit clients, we will be
glad to refer you to an independent firm)

26. Shannon Farr
CPA, ABV, CFF
Valuation Manager | shannonfarr@decosimo.com
Shannon Farr is a valuation manager with more than 15 years
of accounting experience. Her practice has focused on
business valuation and litigation since 2004. She is accredited
in business valuation (ABV) and also certified in financial
forensics (CFF). Shannon performs fair value for financial
reporting valuations to be used in purchase price allocations
and goodwill impairment testing. Her litigation support
experience has been used in numerous marital dissolution
cases as well as contract and shareholder disputes. Shannon
provides expert witness testimony, as well as serving the court
as Special Master.