Don’t play games with goodwill

Description

Abstract: The Financial Accounting Standards Board’s (FASB’s) Statement of Financial Accounting Standards (SFAS) No. 142 requires a company to test goodwill for impairment between annual tests if certain “triggering events” — including “a significant adverse change in legal factors or in the business climate” — indicate that its fair value has deteriorated. This article shows that testing for goodwill impairment is a two-step process, and how a valuator can help put together a goodwill allocation strategy designed to minimize the impact of impairment on the client’s financial statements. A sidebar discusses SFAS 157, which provides accounting rules for determining fair value, and a FASB Staff Position offering guidance on applying SFAS 157 when the market is inactive or when available pricing data reflects distressed sales.