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CUNA Regulatory Comment Call

March 1, 2001

I. RECORDING ASSETS ACQUIRED AND LIABILITIES ASSUMED

1. Initial Recognition and Measurement of Goodwill
   
   Initially, goodwill should be recognized as an asset and measured as the excess of the cost of the acquired entity over the net of the amounts assigned to identifiable assets acquired less liabilities assumed.
2. Recognition of Acquired Identifiable Intangible Assets
   
   An acquired identifiable intangible asset should be recognized separately from goodwill if it meets the asset recognition criteria in paragraph 63 of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, and it meets the either of the following criteria:
   
   
   • Control over the future economic benefits of the asset is obtained through contractual or other legal rights; or
   • The asset is capable of being separated or divided and sold, transferred, rented, or exchanged.
   If the asset recognition criteria and either of those tests are met, then the acquired intangible asset should be amortized over its useful life and reviewed for impairment in accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
   
   Paragraph 63 of FASB Concepts Statement No. 5 states that an asset should be recognized when it meets the assets definition, has a relevant attribute measurable with sufficient reliability, and the information about it is representationally faithful, verifiable, neutral, and capable of making a difference in user decisions.
3. Negative Goodwill
   
   If the net of the amounts assigned to identifiable assets acquired and liabilities exceeds the cost of the acquired entity, that excess is sometimes referred to as negative goodwill. Negative goodwill should be allocated on a pro rata basis to all acquired assets except cash and cash equivalents, financial instruments that are required by generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair value, and assets designated as held-for-sale. If an excess remains after that allocation is complete, that excess amount should be recognized as an extraordinary gain.

II. SUBSEQUENT RECOGNITION AND MEASUREMENT OF GOODWILL

1. Goodwill Amortization
   
   Goodwill should not be amortized.

2. Impairment Review
   
   Goodwill should be reviewed for impairment when an event or series of events occur indicating that an impairment might exist. If an impairment indicator gives rise to both a goodwill impairment test and a test of long-lived assets for impairment under FASB Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the goodwill impairment test should be performed first.
3. Benchmark Assessment
   
   To ensure that an entity develops and documents its process for performing future impairment reviews, a benchmark assessment should be performed whenever the net assets of the combined entity are substantially increased due to an acquisition and the goodwill of the entity is significant in relation to the book value of its other net assets. A benchmark assessment should be completed within one year of the date of the acquisition or at the date of the reorganization that gave rise to the benchmark assessment.
   
   For use in performing the benchmark assessment, the basis for and method of determining the purchase price of an acquired entity and other related factors (such as the underlying reasons for the acquisition and management's expectations related to dilution, synergies, and other financial measurements) should be documented at the acquisition date.
   
   A benchmark assessment should include the following steps:
   
   
   • Identification and documentation of the goodwill and other recognized net assets;
   • Identification and documentation of the key expectations related to the future performance of the entity;
   • Identification and documentation of the model and key assumptions to be used to measure the fair value (for example, a description of the cash flow model to be used and interest rate assumptions);
   • Identification and documentation of the methods and key assumptions used to measure the recognized assets and liabilities of the entity (except goodwill);
   • Measurement and documentation of the fair value of the entity as of the date of the acquisition or reorganization that gave rise to the benchmark assessment;
   and
   • Comparison of the fair value of the entity and the book value of its net assets (including goodwill) to determine the reasonableness of the models and key assumptions used to determine the fair value.
     • If the book value of the net assets of the entity (including goodwill) exceeds its fair value, then the amount of goodwill, and the model used to measure the fair value of the entity, and other assumptions shall be reassessed.
     • If as a result of this assessment any of the information identified and documented in bulleted items 1-3 above change, the fair value of the entity shall be remeasured.
     • If after that reassessment and remeasurement, if any, the book value of the net assets of the entity (including goodwill) exceeds its fair value, goodwill shall be tested for impairment.

4. Recognition and Measurement of an Impairment Loss
   
   In some cases, events of circumstances indicating that goodwill might be impaired may occur prior to completion of the benchmark assessment. Goodwill should be tested for impairment when those events or circumstances occur.
   
   Examples of events or circumstances that would require goodwill to be tested for impairment include:
   
   
   • A current period operating or cash flow loss combined with a history of operating or cash flow losses of a forecast of continuing losses.
   • A significant adverse change in one or more of the assumptions or expectations used in the most recent determination of fair value. Examples include:
   • Product, technology, or service is introduced by a competitor that causes or is expected to cause a significant reduction in market share for a similar product, technology, or service.
   • Revenue of a reporting unit has been or is expected to be significantly lower than previously expected due to changes in technology, the loss of a member or member group, increased competition, or other factors.
   • Operating profit or cash flows of a reporting unit have been or are expected to be significantly lower than previously expected to unplanned cost increases, the inability to realize planned cost reductions, or other factors.
   • A product or technology acquired in a business combination has been or is expected to be replaced significantly earlier than the end of its previously estimated useful economic life, and that product or technology has no alternative use.
   • A loss of key personnel has or is expected to have a significant adverse impact on ability to generate revenues or develop new products, technologies, or services as planned.
   • A decision is made to restructure or change the operating model that represents a significant departure from the strategy assumed in the most recent determination of the entity's fair value (for example, a decision to sell off assets).
   • A change in legal factors or an action or assessment by a regulator that has had or is expected to have a significant adverse effect on the entity.
   • A more-likely-than-not expectation that an entity or a significant portion of the entity will be sold or otherwise disposed of.
   • A test of a significant asset group for recoverability under FASB Statement 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of.
   • A decline in the market capitalization of an entity below the book value of its net assets (including goodwill) that is other than temporary.

III. FAIR VALUE MEASUREMENTS

1. Use of Fair Value in Impairment Measurement
   
   Goodwill should be considered impaired and an impairment loss recognized if the fair value of the entity's goodwill is less than its book value. The fair value of goodwill should be determined by subtracting the fair value of the recognized assets of the entity. The amount of the impairment loss is equal to the difference between the book value and the fair value of goodwill. After an impairment loss is recognized, the adjusted book value of goodwill should be its new cost basis.
2. Definition of Fair Value
   
   The fair value of an asset (or liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and should be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value should be based on the best information available in the circumstances, including prices for similar assets and liabilities and the results of available valuation techniques. Examples of valuation techniques include the present value of expected future cash flows, option pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.

IV. FINANCIAL STATEMENT PRESENTATION

1. Goodwill
   
   The aggregate amount of goodwill should be presented as a separate line item in the balance sheet.
2. Goodwill Impairment Losses
   
   The aggregate amount of goodwill impairment losses should be presented as a separate line item in the opening section of the income statement unless a goodwill impairment loss is association with a discontinued operation. A goodwill impairment loss associated with a discontinued operation shall be included (on a net-of-tax basis) with the results of discontinued operations. The portion of goodwill associated with net assets to be disposed of is recognized as part of the gain or loss on disposal, not as an impairment loss.

V. DISCLOSURES

1. General Information Regarding an Acquisition
   
   Paragraph 95 of APB Opinion No. 16, Business Combinations, requires disclosure of general information about an acquisition in the period in which the business combination is completed. That information should also include the primary reason for the acquisition, including a description of the factors that contributed to a purchase price that reflects a premium that results in recognition of goodwill or a discount that results in recognition of an extraordinary gain.
2. Amount of Acquired Goodwill
   
   For each significant business combination (or group of individually insignificant business combination that are significant in the aggregate) completed in the current reporting period, the amount of acquired goodwill as of the acquisition date also shall be disclosed in the notes to the financial statements if goodwill is significant in relation to the total cost of the acquired entity (or in relation to the aggregate cost of the acquired entities).
3. Change in Book Value of Goodwill
   
   For each period for which a statement of financial position is presented, the notes to the financial statements also should disclose the changes in the book value of goodwill during the period. That disclosure should include the amount of goodwill acquired, the amount of impairment loss recognized, and the amount of goodwill included in the gain or loss on disposal of all or a portion of the entity.
4. Goodwill Impairment Loss
   
   For each goodwill impairment loss recognized, the following information should be disclosed in the notes to the financial statements that include impairment loss:
   • A description of the facts and circumstances leading to the impairment;
   • A description of the entity for which the impairment loss is recognized, the adjusted carrying amount of goodwill, and the amount of the impairment loss;
   and
   • If a recognized impairment loss is an estimate that has not yet been finalized, that fact and the reasons therefore, in subsequent periods, the nature and amount of any significant adjustments made to the initial estimate of the impairment loss.

5. Negative Goodwill
   
   In the period in which in which negative goodwill related to an acquisition is recognized as an extraordinary gain, the information required by paragraph 11 of APB Opinion No. 30,Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, should be disclosed in the notes to the financial statements.

TRANSITION AND EFFECTIVE DATE

1. Initial Date of Application
   
   The provisions of this Statement should be initially applied at the beginning of the first fiscal quarter following its issuance for all entities. Earlier application is not permitted, nor is retroactive application to financial statements of prior periods.
2. Existing Goodwill
   
   Goodwill arising from acquisitions completed before the date this Statement is adopted should be recognized as an extraordinary gain in the period of adoption. Information about that extraordinary gain should be disclosed in accordance with paragraph 11 of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
3. Pro Forma Income
   
   In the period of adoption of this Statement and thereafter until all periods presented reflect goodwill accounted for in accordance with this Statement, income before extraordinary items and net income computed on a pro forma basis shall be displayed for all periods presented. Those pro forma amounts should reflect the reversal of amortization recognized in the periods presented related to goodwill, and any deferred credit related to negative goodwill. Goodwill impairment losses recognized in those prior periods should not be increased to reflect what the losses might have been if goodwill had not been amortized. That pro forma information may be displayed either on the face of the income statement or in the notes to the financial statements. The notes to the financial statements should disclose a reconciliation of reported earnings reflecting adjustments for amortization of goodwill and deferred credit.
4. Impairment Tests at Transition
   
   A transitional benchmark assessment should be completed within six months of the date of adoption for an entity that includes goodwill. If the book value of the net assets of an entity (including goodwill) exceeds the fair value of that entity, existing goodwill should be tested for impairment. If events or circumstances indicating that existing goodwill might be impaired exist or occur within six months of the date of adoption of this Statement, goodwill shall be tested for impairment and completion of the traditional benchmark assessment accelerated.