Some firms with negative equity were concluding no impairment test was indicated because fair value could never be less than zero. So long as fair value is greater than book value, their reporting units were passing the Step 1 goodwill impairment test – or so they reasoned.
FASB amended FASB ASC 350 by publishing Accounting Standards Update No. 2010-28, which now requires the use of qualitative considerations such as business climate, legal factors, adverse actions by regulators, unanticipated competition, loss of key personnel, expectations that some portion of business will be sold or disposed, recognition of goodwill impairment loss in financial statements of a subsidiary of the reporting unit, or testing for recoverability under the impairment or disposal of long lived assets within a reporting unit.
If a reporting unit has negative equity, the new guidance requires those qualitative factors to determine if goodwill impairment exists more likely than not. The new guidance also eliminated the ability conclude the reporting unit was not impaired because of negative or zero equity despite qualitative factors indicating that goodwill is more likely than not impaired. The amendment is in effect for reporting periods beginning after December 15, 2010 with early adoption forbidden. (FASB ASC 350)
FASB Exposure Draft ASC 350 Goodwill Impairment Test