1. Explain how to test goodwill for impairment. pls give detailed answers
Test of impairment:
Goodwill is said to be impaired when the fair market value of the asset < Book value of the asset.
Goodwill is said to be impaired and impairment loss must be recognised by bringing the value of goodwil to its fai market value.
Impairment loss = Book value of goodwill – Fair market value
When a company records goodwill during takeover/merger, the goodwill is continued in the books of accounts with the same amount it is recorded. After a certain period, the value of such goodwill carried in the books of accounts of the company may not be the same as the value it is recorded. Hence to test whether there is decrease in the value of goodwill, the company may observe similar companies and the goodwill they generate vs the goodwill balance as on that date. If the goodwill of similar companies is lower than the goodwill recorded, then there is said to be a decrease in value of goodwill resulting in Impairment of Goodwill