Valuation for Financial Reporting : Fair Value Measurements and ...

42 Valuation for Financial ReportingA detailed determination of the fair value of a reporting unit may be carried forwardfrom one year to the next (i.e., no further impairment analysis is required) if all of thefollowing criteria are met:The assets and liabilities that comprise the reporting unit have not changedsignificantly since the most recent fair value determination.The most recent fair value determination results in an amount that exceeds thecarrying amount of the reporting unit by a substantial margin.Based on an analysis of events, it is determined that the possibility is remote that afair value determination will be less than the current carrying amount of thereporting unit. 55However, the annual impairment test is to be accelerated, and goodwill of areporting unit should be tested for impairment on an interim basis if an event occursthat would probably reduce the fair value of a reporting unit below its carrying value.Examples of such events are:A significant adverse change in legal factors or in the business climateAn adverse action or assessment by a regulatorUnanticipated competitionA loss of key personnelA probable expectation that a reporting unit or a significant portion of a reportingunit will be sold or otherwise disposed ofThe testing for recoverability under SFAS No. 144 of a significant asset groupwithin a reporting unitRecognition of a goodwill impairment loss in the financial statements of asubsidiary that is a component of a reporting unit 56NATURE OF GOODWILLThe definition of goodwill warrants repeating: Goodwill is the excess of the cost of anacquired entity over the net of amounts assigned to assets acquired and liabilitiesassumed. 57 For GAAP purposes, goodwill includes all amounts that fail the criteria ofan identified intangible asset. Importantly, the practitioner must understand that thenature of goodwill for financial reporting is different from that used in a legal setting.Such ‘‘legal goodwill’’ is generally considered to be all value above tangible assetvalue. For financial reporting, it helps to consider the elements of goodwill as follows:The excess of the fair values over the book values of the acquired entity’s netassets at the date of acquisition.The fair values of other net assets that had not been recognized by the acquiredentity at the date of acquisition.