Accounting for goodwill postacquisition—US GAAP
9-44
Under both the guideline public company method and the guideline transaction method, it is
necessary to consider what makes a company “comparable” to the subject reporting unit from a
valuation standpoint. While not an all-inclusive list, the AICPA Goodwill Guide lists operational
characteristics that may be considered, such as whether the comparable company and the reporting
unit (1) are in the same industry or sector, (2) are in similar lines of business, (3) have similar
geographic reach (for example, domestic versus international versus multinational), (4) have similar
customers and distribution channels, (5) have contractual or noncontractual sales, (6) have similar
seasonality trends, (7) have similar business life cycles (e.g., short cycle characterized by ever-changing
technology versus long cycle driven by changes in commodity pricing), (8) are in similar stage of
business life cycle (e.g., start up, high growth, mature), or (9) have similar operating constraints (e.g.,
reliance or dependence on key customers or government regulations).
The AICPA Goodwill Guide also lists financial characteristics that may be considered, such as whether
the comparable company and the subject reporting unit (1) are of similar size (e.g., revenues, assets, or
market capitalization, if subject is public), (2) have similar profitability (e.g., EBITDA, operating
margin, contribution margin), (3) have similar anticipated future growth in revenues and profits, (4)
have a similar asset-base (e.g., manufacturing versus service business), or (5) have a similar pattern of
owning versus leasing real properties, machinery, and equipment (e.g., an entity that owns its
manufacturing operations versus one that leases the building and machinery used for its operations).
Under both the guideline public company method and the guideline transaction method, it is often
necessary to make adjustments to observed market multiples or transactions to make the comparable
company data more consistent with the subject reporting unit. If guideline companies or transactions
exhibit certain differences from the subject reporting unit but are otherwise deemed to be comparable
to the reporting unit, the multiples or transactions associated with these companies should be adjusted
to account for these differences. Such adjustments may relate to factors including profitability,
anticipated growth, size, working capital, nonrecurring or nonoperating income or expenses, or
differences in accounting policies. Once multiples or transactions have been adjusted, outliers that are
not considered to be sufficiently comparable to the reporting unit should be eliminated from the data
set. Generally, multiples that are in a narrow range are better indications of value than a data set with
multiples that exhibit wide dispersion.
While the considerations applicable to the guideline public company method and guideline transaction
method are similar, some additional considerations in applying the guideline transaction method
include:
□ Availability of data: Sufficient data about a specific transaction may not be available to
determine whether the transaction provides a basis for measuring the reporting unit’s fair value.
For example, if information supporting the financial characteristics or the tax structure of the
transaction is not available, it may be difficult to establish that the transaction would be
comparable to a transaction in which the reporting unit is sold.
□ Relevant time period: It is not appropriate to use guideline transactions that took place during
periods in which economic conditions were not comparable to conditions at the goodwill
impairment test date. Generally, the older the transaction, the less relevant the information.
When applying the market approach, it is important to determine whether the resulting enterprise
value would be considered a controlling or noncontrolling interest. The guideline public company
method has historically been regarded as indicating the enterprise or equity value on a noncontrolling
basis. Because the subject reporting unit is valued on a controlling interest basis in step one of the