Business Acquisition, Goodwill And Impairment

Overview: Fair value is an important factor in accounting for:

• Business combinations under ASC 805, Accounting for Business Combinations.
• Goodwill and other intangibles under ASC 350, Goodwill and Other Intangible Assets.
• Impairment issues related to long-lived assets under ASC 360, Property, Plant and Equipment.

When accounting for a business combination, the difference between the cost of an acquired company and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed is recorded as goodwill. Goodwill is not amortized. Rather it must be tested, at least annually, for impairment. The impairment test involves first determining the fair value of each of their reporting units and comparing that fair value to the carrying value to determine if there is a potential impairment issue. If the fair value has fallen below the carrying value the company must perform a second test which will determine whether some or all of the goodwill is impaired and should be written off. In the second test, the carrying amount of goodwill is compared to its implied fair value to determine the amount of the impairment loss. The implied fair value of goodwill is calculated in the same way that goodwill which arises from a business combination is calculated.

Intangible assets that are subject to amortization are also subject to annual impairment testing, or more frequent testing if events or changes in circumstances indicate that the asset might be impaired.

When accounting for business combinations or the impairment of goodwill or other intangibles, fair value is considered “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” as defined in ASC 820, Fair Value Measurement.

Services: We perform supportable and timely valuations in connection with ASC 805, 350 and 360 and we also have the capability to provide your company with the complex footnotes that correspond to these valuations. We assist in the identification and valuation of all assets, tangible and intangible, related to business combinations and/or the related impairment testing. We have extensive knowledge of financial accounting as well as valuation experience which allows us to assist our clients in supporting their valuations and related financial reporting with auditors and the SEC. We apply the guidance of Statements on Standards for Valuation Services, published by the AICPA, to provide a formal report with a calculated value as well as providing support for the assumptions used in the calculations.

Case Study: We were engaged to determine whether a company’s goodwill was impaired due to a substantial decline in their stock price. We calculated the fair value of their reporting unit using a discounted cash flow approach noting that the fair value was less than the carrying value on the books. Prior to determining the amount of goodwill impairment, we were required to determine if there were other financial instruments which were impaired under ASC 360. This analysis required us to calculate the fair value of intangibles such as customer relationships, know-how of specialized employees, trademarks, internet domain names, backlog and employment contracts prior to determining the implied fair value of goodwill. When the analysis was complete, the Company recorded a $1,500,000 impairment related to goodwill and a $670,000 impairment related to the intangible assets.