Goodwill Impairment Potential: Lessons from Purchase Acquisitions

Accounting for business combinations and acquisition goodwill changed in 2001 when the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Elimination of the pooling-of-interest method, new guidance on identifying intangible assets, elimination of goodwill amortization and required impairment testing for goodwill and other intangibles are some of the key changes included in these two new standards. One of the most important changes bank acquirers must now address is annual impairment testing for all intangibles that aren't subject to amortization. The two-step impairment test required by SFAS No. 142 involves first comparing the fair value to book value of each reporting unit. The second step then requires firms to determine the implied fair value of goodwill. An analysis of 51 sample bank purchase acquisitions offers insight into the importance of acquisition pricing and purchase price allocation and their effects on future impairment testing.