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

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SFAS No. 142, Goodwill, And Other Intangible Assets 45evidence. The weight given to the evidence should be commensurate with the extent towhich the evidence can be verified objectively. If a range is estimated for the amountsor timing of possible cash flows, the likelihood of possible outcomes should beconsidered (see also SFAS No. 157, Appendix B [previously Statement of FinancialAccounting Concepts No. 7, Using Cash Flow Information and Present Value inAccounting Measurements]). 66Goodwill impairment exists if the carrying amount of the reporting unit, includinggoodwill, exceeds the fair value of the reporting unit. In such a case, the second step ofthe goodwill impairment test is triggered. The second step of the goodwill impairmenttest requires performing what amounts to a new purchase price allocation as of the dateof the impairment test—as if a business combination were consummated on the date ofthe impairment test, with the fair value of the reporting unit serving as a proxy for thepurchase price. The new valuation work should include determining the new fair valuesof both the originally recognized assets and any new assets that may have beenunrecognized at the valuation date but were developed between the acquisition date andthe test date. The fair values of the assets at the test date are deducted from the fair valueof the reporting unit to determine the implied fair value of goodwill at the test date. If theimplied fair value of goodwill at the test date is lower than its carrying amount, goodwillimpairment is indicated, and the carrying amount of goodwill is written down to itsimplied fair value. 67 Performing the new asset allocation answers the implied question,‘‘What exactly is impaired: specifically identifiable tangible assets, specificallyidentifiable intangible assets, or goodwill?’’ This is where SFAS No. 144 controls.As stated in SFAS No. 142:If goodwill and another asset (or asset group) of a reporting unit are tested forimpairment at the same time, the other asset (or asset group) shall be tested forimpairment before goodwill. For example, if a significant asset group is to be testedfor impairment under Statement 144 (thus potentially requiring a goodwill impairmenttest), the impairment test for the significant asset group would be performed before thegoodwill impairment test. If the asset group was impaired, the impairment loss wouldbe recognized prior to goodwill being tested for impairment. 68This means that, in addition to impairment of goodwill, impairment of other assetsmust also be recognized. Thus, the asset values recognized on the balance sheet as ofthe date of the impairment test will be the lower of the carrying amount or fair value foreach previously recognized tangible asset. For example, assume a company has areporting unit whose assets have a fair value of $80,000,000, including goodwill of$35,000,000. For illustrative purposes, further assume that the relative fair values ofthe assets have been valued and recorded on the books of the acquirer as follows:Recognized Tangible Assets $15,000,000Recognized Identifiable Intangible Assets 30,000,000Goodwill 35,000,000Fair Value of Reporting Unit Assets $80,000,000
46 Valuation for Financial ReportingAfter one year, assume the carrying amounts of certain assets after amortizationare:Recognized Tangible Assets $12,000,000Recognized Identifiable Intangible Assets 25,000,000Now assume that an impairment test is performed at this time one year later, andthe aggregate fair value of the assets of the reporting unit is $70,000,000. This declinein value indicates impairment (step one fails) but not necessarily a goodwill impairmentcharge of $10,000,000. A new asset allocation (step two) must be performed todetermine the new goodwill amount. The assumptions of the fair values as of the dateof the impairment test are:Recognized Tangible Assets $13,000,000Unrecognized Tangible Assets* 1,000,000Recognized Identifiable Intangible Assets 20,000,000Unrecognized Identifiable Intangible Assets* 7,000,000Goodwill 29,000,000Fair Value of Reporting Unit $70,000,000*Assets acquired or developed after the acquisition dateThe step two results are:Net CarryingAmountFair ValueImpairmentAmountSFASCitationRecognized Tangible Assets $12,000,000 $13,000,000 $0 —Unrecognized Tangible Assets 0 1,000,000 0 —Recognized Identifiable IntangibleAssets (with a defined life) 25,000,000 20,000,000 5,000,000* 144Unrecognized IdentifiableIntangible Assets 0 7,000,000 0 —Goodwill 35,000,000 29,000,000 6,000,000 142Total $72,000,000 $70,000,000 $11,000,000*Assumes the asset or asset group failed the recoverability test of SFAS No. 144 and impairment must bemeasured. If the asset or asset group does not fail the recoverability test the asset is deemed to be notimpaired even though the carrying amount exceeds fair value.In this example, step one would fail by $2,000,000 (total carrying amount of$72,000,000 less fair value of $70,000,000), but the step two analysis shows a requiredimpairment expense of $11,000,000 ($5,000,000 under SFAS No. 144 and $6,000,000under SFAS No. 142).
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VALUATION FORFINANCIALREPORTINGFair
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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