The goodwill impairment guidance within Section 350-20-35 of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) describes the models that must be used to recognize and measure a goodwill impairment loss. One model is applicable to entities that qualify for and have elected the private-company goodwill alternative, and the other model is applicable to entities that have not elected (or are not able to elect) that alternative. Regardless of the model applied by an entity, a goodwill impairment test is required upon the occurrence of a triggering event. In addition, when an entity is required to perform a goodwill impairment test, it has the option to first perform a qualitative assessment of goodwill impairment. If it passes the qualitative assessment, there is no goodwill impairment recognized and the entity does not have to perform the quantitative assessment of goodwill impairment. Conversely, if it fails the qualitative assessment (or elects not to perform the qualitative assessment), the entity then performs the quantitative assessment. In the current economic environment, a question that arises is whether it is cost-beneficial to perform the qualitative assessment of goodwill impairment when the occurrence of a triggering event is what prompted the need to perform the goodwill impairment test. In the vast majority of situations, we believe the short answer to this question is no.

The reason we believe it is not cost-beneficial to perform the qualitative assessment of goodwill impairment when the entity has concluded a triggering event has occurred hinges on the definition of a triggering event and the threshold for passing or failing the qualitative assessment:

• Definition of a triggering event. A triggering event is when events occur or circumstances change indicating that the fair value of a reporting unit or the entity (the latter is only an option for those entities that have elected the private-company goodwill alternative) may be below its carrying amount (which includes goodwill). ASC 350-20-35-3C provides many (but not all of the potential) examples of triggering events, including a deterioration in general economic conditions, an increased competitive environment, increases in the costs of raw materials or labor, negative or declining cash flows and changes in key personnel. This list is not all-inclusive, and an entity should consider other relevant events and circumstances that might affect the fair value or carrying amount of the reporting unit or entity. Positive and mitigating events and circumstances also should be considered.
• Qualitative impairment assessment threshold. The threshold for passing or failing the qualitative impairment assessment for goodwill is whether it is more likely than not that the fair value of the reporting unit or entity (again, the latter is only an option for those entities that have elected the private-company goodwill alternative) is less than its carrying amount. If so, the entity fails the qualitative assessment and must quantitatively test its goodwill for impairment. If not, the entity passes the qualitative assessment and it is finished with its impairment testing (i.e., no impairment is recognized). It is important to note that the factors that should be considered in evaluating whether the entity has passed or failed the qualitative impairment assessment are the same as those factors analyzed to determine whether a triggering event has occurred (i.e., the factors in ASC 350-20-35-3C, as well as other relevant factors).

Also important to this discussion is that performing and documenting a qualitative assessment of goodwill impairment is not necessarily a shortcut compared to performing and documenting a quantitative assessment of goodwill impairment. The necessary analysis and documentation related to assessing the qualitative effects of the factors in ASC 350-20-35-3C (as well as other relevant factors) on the fair value and carrying amount of the reporting unit or entity often requires the same amount of resources as performing a quantitative assessment of goodwill impairment.

Given the similarities between the analyses required to determine whether a triggering event has occurred and whether an entity passes or fails the qualitative assessment of goodwill impairment, as well as the level of effort required to perform the latter, we believe spending the time and effort to perform a qualitative assessment of goodwill impairment is likely not cost-beneficial when the performance of the goodwill impairment test was prompted by the entity concluding a triggering event occurred. In other words, we believe it would be very unlikely that an entity would be able to conclude that it is not more likely than not that the fair value of the reporting unit or entity is less than its carrying amount (i.e., passing the qualitative assessment) after having just concluded that the fair value of the reporting unit or entity may be below its carrying amount (which was the outcome of the triggering event analysis that led to the goodwill impairment testing in the first place).