Zyla's step-by-step approach to goodwill impairment testing under FASB ASC 350

Take note of this great post on the CPA Insider from the AICPA.

In the article, Mark Zyla points out that consistency is the most important principle in Step 2 valuation analyses (conducted only when the first analysis concludes that the business unit's fair value is less than its book value)--in most cases either of the following approaches work, as long as the analyst doesn't change mid-stream:

The fair value of a reporting unit is determined in accordance with guidance in paragraphs 22-24 of FASB ASC 350-20-35 and in FASB ASC 820. There is significant diversity in practice about the appropriate interest to be measured when comparing the carrying amount of reporting unit to its fair value under step one of goodwill impairment testing. Many valuation specialists believe the appropriate interest to be measured is the invested capital of the reporting unit (equity plus interest bearing debt). The supporters of this approach argue that measuring invested capital eliminates any issues related to how debt is allocated to the reporting unit or how the entity actually financed it. Other valuation specialists take the position that the appropriate interest to be measured is the equity of the reporting unit. This belief is often based upon FASB ASC 350-35-22 and its reference to quoted market prices.