Fair value measurements in impairment testing: how SFAS No. 157 increases consistency and comparability.

(6) A direct measure of the fair value of goodwill is impracticable since goodwill is measured as a residual amount at the moment of a business combination. Accordingly, SFAS 142 requires calculating the implied fair value of goodwill using a method similar to that used in the allocation of the purchase price to the net assets at the moment of a business combination and initial recognition of goodwill, i.e., subtracting the fair value of the net assets of a reporting unit from the fair value of the reporting unit as a whole, to determine the implied fair value of that reporting unit's goodwill.

Omar Esquivel, Deloitte & Touche LLP

Sylwia Gornik-Tomaszewski, The Peter J. Tobin College of Business, St. John's University Exhibit 1: HIERARCHY OF INPUTS TO VALUATION TECHNIQUES Level 1 Unadjusted quoted prices in active market for identical assets and liabilities Level 2 Quoted prices for similar assets or liabilities in active markets Quoted prices for identical or similar assets or liabilities in markets that are not active Inputs other than quoted prices that are observable for the asset or liability, e.g., interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risk, and default rates Market-corroborated inputs; that is, inputs that are derived from or corroborated by observable market data, by correlation or other means Level 3 Unobservable inputs based on the reporting entity's own assumptions about the assumptions that market participants would use, based on the best information available in the circumstances Exhibit 2. FAIR VALUE IN THE MEASUREMENT OF IMPAIRMENT OF ASSETS Asset How Fair Value Details of Impact of Category is Used Impairment Test SFAS157 Long-lived Fair value is If carrying amount is Provides

assets held used to not recoverable (step 1) guidance on

and used, measure the and exceeds its fair how to measure

and impairment value (step 2), fair value,

intangible loss. recognize impairment including

assets loss in an amount equal clarification

subject to to that excess. that

amortization measurements Intangible Fair value is If the carrying amount shall reflect

assets not used to exceeds its fair value, the

subject to determine and recognize impairment assumptions

amortization measure the loss in an amount equal about the

impairment to that excess. assumptions

loss. market Goodwill Fair value of If the carrying amount participants

the reporting of the reporting unit would use.

unit is used exceeds its fair value Expands

to identify (step 1) and the disclosures,

potential carrying amount of in particular

impairment. reporting unit goodwill as many of

Implied fair exceeds its implied fair these

value of value (step 2), non-recurring

goodwill is recognize impairment measurements

then used to loss in an amount equal are likely to

measure the to the excess computed fall within

impairment in step 2. Level-3

loss. hierarchy Long-lived Fair value Write-down to fair value (e.g.,

assets to be (less cost to less cost to sell if information

disposed of sell) is used lower than the carrying used to

by sale to measure the amount. develop

write-down. inputs). Certain Fair value is If a decline in fair Provides

investments used to value is judged to be guidance on

in debt and measure the other than temporary, how to measure

equity impairment write down investment to fair value

securities loss for other fair value. Expands

(classified than temporary disclosures,

as declines. in particular

available- for

for-sale or measurements

held-to- that are

maturity) performed on a

recurring

basis. This exhibit presents the existing fair-value-based impairment models in U.S. GAAP.