If so, your company must perform an annual goodwill impairment test in order to comply with FAS 142. Prior to the adoption of FAS 142, businesses amortized goodwill for a period not to exceed 40 years. With the adoption of FAS 142, goodwill is no longer amortized, but it is written down if it becomes impaired. The company must perform an annual goodwill impairment test to determine if goodwill impairment has occurred.
To properly perform the two steps of the goodwill impairment test, a company should hire a financial advisory firm with significant business valuation experience. The advisors of the firm should hold professional accreditations through the American Society of Appraisers and other financial/accounting associations. The hired firm's advisors will work with the company's management and auditors (the "Advisory Team") to conduct the goodwill impairment test in a timely manner.
The first step of the goodwill impairment test requires the company to assign goodwill to "reporting units." According to FAS 142, Paragraph 30, "a reporting unit is an operating segment or one level below an operating segment (referred to as a component)." The reporting unit should be the level of internal reporting that reflects the way an entity manages its business or operations. Once the reporting units have been identified, the Advisory Team determines the "fair value" for each reporting unit and compares it to the carrying amount (book value) of the reporting unit. If the fair value of the reporting unit exceeds the carrying amount, goodwill for the reporting unit is considered not impaired and the second step of the test is not required. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, the second step of the goodwill impairment test must be performed to determine the amount of impairment.
For each reporting unit requiring the second step of the goodwill impairment test, the Advisory Team allocates the fair value of the reporting unit to the reporting unit's individual assets and liabilities in accordance with FAS 141, Paragraphs 37 - 39. The residual value is the fair value of goodwill. The difference between the carrying amount of the goodwill and the fair value of the goodwill is the amount of the "impairment loss." The second step of the goodwill impairment test may require the Advisory Team to utilize machinery & equipment and intangible asset appraisers to assist the business appraisers. This step can be quite involved depending on the assets of the business.
The Malibu Group has significant experience and expertise determining the value of private businesses. We have performed hundreds of business valuations for a variety of purposes including mergers & acquisitions, buy/sell agreements, gift & estate tax planning, fairness opinions, GAAP requirements, S-Corp conversions, ESOPs, shareholder litigation, and divorce cases. Our directors hold professional designations including: Accredited Member of the American Society of Appraisers, Chartered Financial Analyst, Certified Public Accountant, and Master in Business Administration from top MBA programs. Please contact Kevin Kennealy, the Director of Business Valuations, for more information on The Malibu Group's business valuation services. Kevin can be reached at 513-583-5413 ext. 182, or by email at Kevin@malibugrp.com.