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July, 2001 New Accounting Standards for Goodwill On June 29, 2001, The Financial Accounting Standards Board (FASB) unanimously voted in favor of Statement 142, Goodwill and Other Intangible Assets. Prior to this statement, goodwill was amortized over its useful life not to exceed forty years. Under FASB 142, goodwill will still be recognized as an asset, however, amortization of goodwill will no longer be permitted. Instead, goodwill and other intangibles will be subjected to an annual test for impairment of value. This will not only effect goodwill arising from acquisitions completed after the effective date, but will also effect any unamortized balance of goodwill. EFFECTIVE DATE: The effective dates for companies vary. Companies with December 31st year-ends are required to adopt FASB 142 by January 1, 2002, and do not have the option of early adoption. Fiscal year end companies are required to adopt the statement for fiscal years beginning after December 15, 2001, but may elect early adoption provided that no interim financial statements have been issued prior to adoption. TRANSITIONAL IMPAIRMENT TEST: Upon adoption of FASB 142, businesses are required to perform the Transitional Impairment Test, which is the first part of the Goodwill Impairment Test (discussed later), on all goodwill within six months. The calculated amounts should be measured as of the first of the year, and, if the first step indicates that goodwill is impaired, any impairment loss should be calculated and recorded as soon as possible prior to year-end. An impairment loss resulting from the transitional test is treated as a change in accounting principle and recognized in the first interim period financial statements. GOODWILL IMPAIRMENT TEST: After the Transitional Impairment Test is conducted, FASB 142 requires businesses to perform the Goodwill Impairment Test on an annual basis, unless circumstances indicate otherwise. The annual test may be avoided in the first year, if the entity designates the beginning of the year as the date of its annual impairment test. The annual impairment test can be performed anytime during the year, so long as the measurement date is consistently used from year-to-year. Also, different reporting units are allowed to use different measurement dates. The Goodwill Impairment Test is a two step approach conducted at the reporting unit level. A reporting unit is referred to as "the lowest level of an entity." Business units, subsidiaries, operating units and divisions are all examples of reporting units. Step 1: The first step is to identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Step 2: The second step, which is only required if there is an impairment identified in the first step, is to compare the implied fair market value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to the excess and presented as a separate line item on the financial statements. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets), as if the reporting unit had been acquired in a business combination. The fair value of the reporting unit is the purchase price. The excess "purchase price" over the amounts assigned to assets and liabilities would be the implied fair value of goodwill. EXCEPTIONS TO GOODWILL TESTING ON AN ANNUAL BASIS: The impairment test is not required in a specific year if the entity can meet all of three criteria. If met, the entity may presume that the current fair value of a reporting unit is in excess of its current carrying amount. The three criteria are as follows: The assets and liabilities that make up the reporting unit have not changed significantly since the previous fair value computation; The previous computation of the reporting unit’s fair value exceeded the carrying amount of that unit by a substantial enough margin to make it highly unlikely that a current fair value computation would result in the fair value of the reporting unit falling below its current carrying amount; And no adverse events have occurred that would indicate a likelihood that the current fair value of the reporting unit has fallen below its current fair value amount since the previous computation of the reporting unit’s fair value. Certain circumstances, if present, would require the reporting unit to test the impairment of goodwill between annual tests. These include the following: An event or circumstance occurs that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount and it is unlikely that the situation would reverse before the next annual test (i.e. changes in business climate or market, legal issue, regulatory actions, unanticipated competition, or loss of key employees); A more-likely-than-not expectation arises that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; A significant asset group within a reporting unit is tested for recoverability under FASB Statement 121; Or a goodwill impairment loss is recognized by a subsidiary that is part of a larger or different reporting unit at a higher level of consolidation. The above summary is not intended to address all aspects of FASB 142, but rather identify the key components of the statement. If after reviewing these new rules you have questions or need additional information please call your Bober, Markey, Fedorovich & Company partner/manager, or contact Jim Merklin 330-762-9785 or via e-mail at jimm@BoberMarkey.com. |
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