Question & Answer: 1. Explain how to test goodwill for impairment. pls give proper detailed answers……

Goodwill impairment occurs when the recognized goodwill associated with an acquisition is greater than its implied fair value. Goodwill is a common by product of a business combination, where the purchase price paid for the acquired is higher than the fair values of the identifiable assets acquired. After goodwill has initially been recorded as an asset, regularly test it for impairment.

Goodwill Impairment Testing

The examination of goodwill for the possible existence of impairment involves a multi-step process, which is:

1.    Assess qualitative factors. Review the situation to see if it is necessary to conduct further impairment testing, which is considered to be a likelihood of more than 50% that impairment has occurred, based on an assessment of relevant events and circumstances. Examples of relevant events and circumstances that make it more likely that impairment is present are the deterioration of macroeconomic conditions, increased costs, declining cash flows, possible bankruptcy, a change in management, and a sustained decrease in share price. If impairment appears to be likely, continue with the impairment testing process. You can choose to bypass this step and proceed straight to the next step.

2.    Identify potential impairment. Compare the fair value of the reporting unit to its carrying amount. Be sure to include goodwill in the carrying amount of the reporting unit, and also consider the presence of any significant unrecognized intangible assets. If the fair value is greater than the carrying amount of the reporting unit, there is no goodwill impairment, and there is no need to proceed to the next step. If the carrying amount exceeds the fair value of the reporting unit, proceed to the next step to calculate the amount of the impairment loss.

3.    Calculate impairment loss. Compare the implied fair value of the goodwill associated with the reporting unit to the carrying amount of that goodwill. If the carrying amount is greater than the implied fair value, recognize an impairment loss in the amount of the difference, up to a maximum of the entire carrying amount (i.e., the carrying amount of goodwill can only be reduced to zero).

To calculate the implied fair value of goodwill, assign the fair value of the reporting unit with which it is associated to all of the assets and liabilities of that reporting unit (including research and development assets). The excess amount (if any) of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the associated goodwill. The fair value of the reporting unit is assumed to be the price that the company would receive if it were to sell the unit in an orderly transaction (i.e., not a rushed sale) between market participants. Other alternatives to the quoted market price for a reporting unit may be acceptable, such as a valuation based on multiples of earnings or revenue.

Impairment testing is to be conducted at annual intervals. You may conduct the impairment test at any time of the year, provided that the test is conducted thereafter at the same time of the year. If the company is comprised of different reporting units, there is no need to test them all at the same time.