The Financial Accounting Standards Board has finalized its guidance on how companies should test goodwill for impairment, or a write down, when the book value of a given business unit falls into negative equity.

The FASB published Accounting Standards Update No. 2010-28 to explain that companies need to look at the situation a little more critically than perhaps they have in the past to reach a logical conclusion about whether a write down in goodwill might be in order. The guidance was recommended to the FASB by its Emerging Issues Task Force after the Securities and Exchange Commission questioned the method some companies were using.

Goodwill is an intangible asset that arises on corporate balance sheets as a result of a merger or acquisition. It represents the additional amount a company pays to acquire a business unit beyond the fair value of its collective assets and liabilities. Companies are required to assess any goodwill on the books annually and write it down if warranted.

The SEC became concerned when it noticed some companies were looking at negative equity situations and concluding automatically that no impairment was indicated because, by its definition, fair value can never be less than zero. As long as the fair value is greater than the book value, there's no impairment, some companies were reasoning.

The EITF suggested FASB require companies to look at the situation with more than a single mathematical equation. As a result, the new guidance requires companies to look at some qualitative considerations as well. That includes things like a significant downturn in the business climate, legal factors, an adverse action by a regulator, unanticipated competition, loss of key personnel, or an expectation that some portion of the business will be sold or otherwise disposed, among others.

For public companies, the new guidance takes effect for fiscal years or interim reporting periods beginning after Dec. 15, 2010, with early adoption forbidden.