A gain or loss that results from the disposal of a business should be recognized at the date of sale. In most cases, such a gain or loss may not be significant when impairment losses have been recognized at the time the disposal group meets the held for sale criteria (or upon the expectation to sell) and is subsequently adjusted to its fair value less cost to sell prior to the disposition. At the time of sale, assets, including any goodwill, and liabilities included in the carrying amount of the disposal group will be factored into the determination of gain or loss on the disposal of a business.
Example BCG 9-23 demonstrates the goodwill accounting considerations when disposing of a business that is a portion of a reporting unit.
EXAMPLE BCG 9-23
Disposal of a business that is a portion of a reporting unit
Company A is a calendar year-end diversified manufacturing company that has an electronics reporting unit. The electronics reporting unit includes two geographically based businesses, one in the United States and the other in Europe, both of which were originally acquired in purchase transactions.Neither of these two businesses meet the definition of a componenton their ownas there is no discrete financial information regularly reviewed by segment management.Although its US electronics business is profitable and expected to remain stable, Company A’s electronics business in Europe has only managed to break even and is in decline due to high levels of competition. Company A’s annual goodwill impairment testis performed on December 31 each year. The December 31,20X1quantitative goodwill impairment testindicated that the $1,100 carrying amount of the electronics reporting unit’s goodwill was not impaired because thereportingunit’s fair value of $5,500 exceededitscarrying amount of $5,100. For simplicity, all tax effects have been ignored, and assume that there is no change in other net assets throughout the example. It has also been assumed that there are no direct costs to sell the European electronics business.
What are Company A’s goodwill accounting considerations given the decline in the European electronics operations?
Analysis
“More likely than not” expectation that European electronics business will be sold
In May 20X2, the European electronics business loses one of its significant customers. Based on this event, while Company A’s management has not yet committed to a plan to sell the European electronics business, it determines that it is more likely than not that it will sell the European electronics business within the next year and that the fair value of the electronics reporting unit may no longer exceed the unit’s carrying amount. Therefore, Company A tests the entire electronics reporting unit’s goodwill for impairment during May 20X2. Prior to testing the electronics reporting unit’s goodwill for impairment, Company A determines that the carrying amounts of the unit’s other assets do not require adjustment under other applicable GAAP (e.g., ASC 350 and ASC 360-10) including testing the European electronics business under the held-and-used model.Company Aperformsthequantitativegoodwill impairment testof the electronics reporting unitand determines that there is a $100 goodwill impairment lossbecause the fair value of the reporting unitis less than the carrying amountby that amount. After the entity recognizes the goodwill impairment loss, the carrying amount of the electronics reporting unit is as follows:
Carrying Amount | ||||
|---|---|---|---|---|
Goodwill | $1,000 | |||
Other net assets: | ||||
US electronics business | 2,300 | |||
European electronics business | 1,700 | |||
Total | $5,000 | |||
View table
European electronics business is held for sale
In September 20X2, Company A’s management commits to a plan to sell the European electronics business. That plan meets all ofthe criteriafor the European electronics business to be (1) classified as held for sale (i.e., a disposal group)under ASC 360-10-45-9, and (2) reported as a discontinued operation pursuant to ASC 205-20. At this point, Company A would assign the electronics reporting unit’s goodwill to the US and European electronics businesses based on the relative fair values of those businesses. Company A determines this goodwillattribution as follows:
US | Europe | Total | |||
|---|---|---|---|---|---|
Fair values | $3,000 | $2,000 | $5,000 | ||
Relative fair value | 60% | 40% | 100% | ||
Goodwill | $600 | $400 | $1,000 |
View table
Company A would measure the European electronics business at the lower of its carrying amount or fair value less cost to sell pursuant to ASC 360-10. In doing so, however, Company A would first adjust the carrying amount of the goodwill that was assigned to the European electronics businessby applying ASC 350-20’s goodwill impairment test. After Company A assigns goodwill to the European electronics business, the business’s carrying amount of $2,100 (goodwill of $400 and other net assets of $1,700) exceeds its fair value of $2,000.Thus, Company A determines the European electronics business has a $100 goodwill impairment loss because the fair value of the business is less than its carrying amount.
In its third quarter financial statements, Company A would recognizean impairmentloss of $100. There would be no further loss recognized for classifying the European electronics business as held for sale because the carrying amount would be equal to the disposal group’s fair value less cost to sell.
Company A would also need to test the goodwill of $600 that was assigned to the US electronics business (i.e., the portion of the electronics reporting unit that is to be retained) for impairment. That goodwill would not be impaired because the US electronics business’s fair value of $3,000 exceeds its carrying amount of $2,900 (goodwill of $600 and other net assets of $2,300).
European electronics business is sold
InNovember20X2, Company A sells the European electronics business for $1,800. The sales price is below Company A’s previous estimates of the European electronics business’s fair value because the business lost another major customer inOctober20X2. In its fourth quarter financial statements, Company A would recognize a $200 losson sale(sales proceeds of $1,800 minus a carrying amount of $2,000)forthe disposal ofthe European electronics business.
Company A does not believe that the additional loss is an indicator of the value of the goodwill assigned to the US electronics business and, therefore, it does not represent a triggering event for an interim impairment test of the goodwill included in the US electronics business. Company A is still be required to perform its annual goodwill impairment test on December 31, 20X2 for the US electronics business (Company A’s remaining electronics reporting unit).
