What options does 360 Painting have when conducting impairment testing for goodwill?
360_Painting Franchise · 2025 FDDAnswer from 2025 FDD Document
In conducting impairment testing, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If the Company performs a qualitative assessment and determines that the carrying value more likely than not exceeds the fair value, then the quantitative impairment test is performed, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The ultimate outcome of the goodwill impairment assessment will be the same whether the Company chooses to perform the qualitative assessment or proceed directly to the quantitative impairment test. The Company chose to perform a qualitative impairment test for goodwill as of December 31, 2024 and 2023. The Company determined the fair value of goodwill exceeds the carrying value and no further analysis is required as of December 31, 2024 and 2023.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 56)
What This Means (2025 FDD)
According to 360 Painting's 2025 Franchise Disclosure Document, the company has two options when conducting impairment testing for goodwill. Goodwill, which represents the excess of acquisition costs over the fair value of acquired assets and liabilities, is tested for impairment annually. This testing aligns with guidance from FASB ASU 2021-03, "Accounting Alternative for Evaluating Triggering Events," and is evaluated if year-end circumstances indicate a triggering event.
360 Painting can first assess qualitative factors to determine if events or circumstances suggest that the estimated fair value of a reporting unit is less than its carrying amount. If this qualitative assessment indicates that the carrying value likely exceeds the fair value, 360 Painting must then perform a quantitative impairment test. However, 360 Painting can also elect to skip the qualitative assessment and proceed directly to the quantitative impairment test.
The FDD states that the ultimate outcome of the goodwill impairment assessment will be the same whether 360 Painting chooses to perform the qualitative assessment or proceeds directly to the quantitative test. For the years 2024 and 2023, 360 Painting chose to perform a qualitative impairment test for goodwill and determined that the fair value of goodwill exceeded the carrying value, requiring no further analysis.
For a prospective franchisee, this information is relevant because it provides insight into how 360 Painting manages and assesses the value of its intangible assets, including goodwill. Understanding these accounting practices can help franchisees assess the financial health and stability of the franchisor. Additionally, the fact that 360 Painting uses a qualitative assessment first, and that no further analysis was required for 2023 and 2024, may indicate a stable financial position.