Friday, February 13, 2009

Got Goodwill? Part 17: SEC Views on Impairment

SEC Speech Shares Views on Impairment

At the December AICPA/SEC/PCAOB Conference, SEC staff talked a lot about goodwill in a number of speeches.

Key points:

Thorough disclosures about critical accounting estimates related to goodwill impairment testing are required.


  • How goodwill reporting units are determined, including any aggregation of reporting units,
  • Methodology used to determine the fair value of reporting units (including the weighting of each approach in cases in which multiple approaches are used)
  • Date or range of dates used to determine market capitalization
  • Evidence used to assess the reasonableness of an implied control premium (difference between the fair value of the reporting units and the enterprise’s market capitalization)
  • Key assumptions and sensitivity analysis related to those key assumptions.
  • Early warning disclosures in MD&A if it is reasonable to expect a material impairment in a future period.


SEC speakers said staff will ask questions about the adequacy of disclosures if there are indicators of impairment but no impairment charge.

SEC staff warned that assumptions underlying impairment analyses should be consistent with other accounting measurements and non financial disclosures in their SEC filings.

Goodwill Impairment Calculations

Reconciliation to market capitalization—a key element of the analysis is to reconcile the aggregate fair values of goodwill reporting units to market capitalization.

SEC staff does not expect a registrant to determine its market capitalization using a point in time market price as of the date of its goodwill impairment assessment.

Instead, consider recent trends in its stock price over a reasonable period.

Given recent stock price volatility, SEC staff would likely not expect enterprise market capitalization to be calculated solely based on stock price fluctuations on or around the goodwill impairment assessment date.

They warned not to ignore a recent drop in market capitalization.

The SEC does not apply a bright-line test to analyzing control premiums. They say that application of judgment can result in a range of reasonably possible control premiums.

Evidence should support the judgments that the implied control premium is reasonable, and support should be in the form of contemporaneous documentation, including any identified transactions.

It is not acceptable to use a “rule of thumb” to support the implied control premium.

The amount of documentation supporting the implied control premium to increase as the control premium increases.

A different speech revealed:

Indicators of Impairment According to the SEC

  • Recent operating losses at the reporting unit level
  • Downward revisions to forecasts
  • Decline in enterprise market capitalization below book value
  • Restructuring actions or plans
  • Industry trends.

Malcolm McKay

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