Despite a new allowance in accounting rules for companies to shed the most oppressive part of goodwill impairment testing, not all public companies are rushing to avail themselves of the simplification.

The latest annual Duff & Phelps study of goodwill impairments suggests only one-third of public companies plan to take advantage of the early adoption provision in Accounting Standards Update No. 2017-04, which allows companies to rely on their high-level assessment of goodwill as the basis for any markdown they would take in financial statements. Another one-third said they will not adopt the new accounting allowance until the effective date, and 40 percent said they were still evaluating whether to leverage the simpler method sooner than later.

Goodwill is an intangible asset that arises on corporate balance sheets as a result of mergers or acquisitions; it represents the value of an acquired business unit beyond the fair value of its individual assets and liabilities. Accounting rules require companies to test the value of goodwill by comparing the carrying value of a reporting unit on the books with the current value to determine if the goodwill figure is holding up or needs to be written down.

Under historic rules, if that high-level assessment suggested goodwill might be impaired, companies would need to perform a complete fair value measurement of all of the unit’s assets and liabilities to determine the residual amount that would represent the new goodwill figure. The Financial Accounting Standards Board has heard the howling over the years about how costly and difficult that effort can be, especially for private companies, prompting the board to rethink the necessity of that second step.

After giving private companies the option to put their pencils down following the first step of the goodwill impairment test, FASB granted public companies the same option in ASU 2017-04. Now the Duff & Phelps study suggests companies are thinking hard about the benefits of the simpler test weighed against the precision it offers in terms of the markdown that must be taken.

Gary Roland, a managing director at Duff & Phelps, says in a Q&A within the firm’s report that he sees  companies evaluating whether to adopt the simplification early or to proceed with testing using the second step. Companies are realizing they will get different outcomes depending on whether they perform the second step or not.

“Failing ‘step one’ will always result in a goodwill impairment under the new one-step test, which was not always the case under the two-step model,” says Roland. “Second, the magnitude of any impairment can differ under a one-step test vs. the two-step test. This has a lot to do with the underlying assets that are sitting in the reporting unit.”

If the fair value of long-lived assets is below the carrying amount, for example, companies will end up with a bigger markdown to goodwill under the first step of the goodwill impairment test than under the second step, Roland says. Similarly, if a company has significant unrecognized or appreciated intangible assets, they likely will end up with a lower markdown to goodwill under the first step.

FASB considered but dismissed the idea of allowing companies to continue to perform the second step on an optional basis, looking for greater consistency in how all companies would perform testing. The new standard eliminating the second step takes effect for public companies in 2020, but companies are permitted early adoption beginning in 2017.