Choosing simplicity over precision, the Financial Accounting Standards Board has decided it will do away with the onerous second step of the goodwill impairment test.

FASB met recently to discuss feedback to its May 2016 proposal to revise goodwill impairment testing in a way that would put an end to “step two,” the controversial and complex fair value exercise companies must complete when they conclude goodwill for a particular reporting unit is not holding up. The board proposed dropping the step after already making it simpler for private companies through its Private Company Council.

Goodwill arises on corporate balance sheets as a result of mergers and acquisitions. It represents the premium a company pays when it acquires a profitable business that is worth more that the sum of its individual assets and liabilities.

Once goodwill is recorded as an asset on the balance sheet, companies are required to keep tabs on it to assure its value is holding up over time. Accounting rules provide for both qualitative testing and quantitative testing to determine whether goodwill is in need of a markdown.

If the fair value of an acquired unit exceeds the carrying value, or the amount recorded on the books, then companies are required to perform a full-on fair value measurement of all the assets and liabilities in the reporting unit to determine the amount by much goodwill should be written down. That’s the second step of the test FASB proposed to drop, after hearing years of outcry that the test was overly complicated and costly to complete.

In its recent meeting to make some final decisions about the proposal, FASB heard from staff members that nearly everyone who took the time to write to FASB about the proposal agreed with dropping the second step. Dropping step two, however, will produce a theoretically less precise goodwill markdown amount, leading to varying views on the extent to which that’s a concern, and what could or should be done to address it.

FASB decided not only to drop the second step of the test, but also to not allow companies to use the test even optionally. The board affirmed its original view that companies should apply the same one-step impairment test to all reporting units, even those with zero or negative carrying amounts. FASB says an entity will be required to disclose the amount of goodwill allocated to reporting units with zero or negative carrying amounts, but the board will not require additional disclosures about those units.

FASB instructed its staff to draft the final Accounting Standards Update for a board vote. For public companies, the new approach to goodwill impairment testing will take effect in 2020.

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