Trademark with 5 years remaining has been amortized to $200,000.

There has been an advancement in a

competitor's trademark which is deemed an "event or change in circumstance" which may impair our
trademark. We have estimated the future cash flows as follows:

Total Year 1 Year 2 Year 3 Year 4 Year 5

Undiscounted cash flows 175,000 100,000 50,000 10,000 10,000 5,000

Because the undiscounted cash flows of $175,000 is less than the NBV of $200,000, there has been an
impairment. We have to estimate the fair value then of our intangible. Most likely we will just DISCOUNT the
cash flows. Using a rate of 8%, they are:

Total Year 1 Year 2 Year 3 Year 4 Year 5

Discounted cash flows 160,198 96,225 44,549 8,250 7,639 3,536

Therefore our estimated impairment is:

Estimated fair value 160,198

Less NBV 200,000
IMPAIRMENT 39,802

ENTRY:
Impairment expense 39,802
Intangible asset (or accum amort.) 39,802
advancement in a
y impair our

re has been an
just DISCOUNT the
Reporting Unit Balance Sheet
Cash 200,000
Receivables 300,000
Inventory 700,000
PP&E, Net 800,000
Goodwill 900,000
Less: all liab. (500,000)
Net assets of reporting unit 2,400,000
STEP 1: Compare to fair value of reporting unit.
If fair value of the reporting unit is $2.8 million, step one passed and we are done.

BUT if the fair value of the reporting unit is $1.9 million, we have a problem and have to do step 2
STEP 2: Compute "implied fair value of goodwill"

Net assets of reporting unit, excluding goodwill 1,500,000

Fair value of reporting unit net assets, excluding g. will 1,900,000 *
Implied fair value of goodwill 400,000
COMPUTE IMPAIRMENT:
Goodwill on books 900,000
Implied fair value (400,000)
GOODWILL IMPAIRMENT 500,000

ENTRY:
Impairment expense 500,000
Goodwill 500,000

* Assumes that the book value of the assets and liabilities are the same as their fair value.
Fair value of reporting unit 10,000,000
NBV of reporting unit 11,000,000 INCLUDING GOODWILL OF 1,000,000

BALANCE SHEET BOOKS FAIR VALUE

Cash 1,250,000 1,250,000
A/R 2,500,000 2,450,000
Inventory 3,000,000 2,850,000
PP&E, net 5,000,000 4,750,000
Goodwill 1,000,000 N/A
A/P (1,000,000) (1,000,000)
Debt (750,000) (750,000)
Equity 11,000,000 9,550,000

STEP 1:
Need to go to step 2 right (NBV>FV)

STEP 2:
WE ESSENTIALLY PERFORM A NEW GOODWILL COMPUTATION, REPLACING PURCHASE
PRICE WITH FAIR VALUE OF REPORTING UNIT!

Fair value of reporting unit 10,000,000

Fair value of net assets, excluding g will 9,550,000
Implied goodwill 450,000
Goodwill on books 1,000,000
IMPAIRMENT (550,000)
Cash AFTER IMPAIRMENTS
Cash 200,000 200,000
Receivables 300,000 300,000
Indefinite life intangibl (a) 125,000 Deal with these first! 115,000
Definite life intangible (b) 175,000 175,000
Inventory 700,000 700,000
PP&E, Net (C ) 800,000 800,000
Goodwill 900,000 900,000
Less: all liab. -500,000 -500,000
Net assets of reporting unit 2,700,000 2,690,000

(a) This is an indefinite life intangible. We perform annual fair value estimate and determine that it is overvalued by $10k
(b) This is being amortized, we only test if it has "an indication of a change in circumstance". If there had been no change, th
lets say there was, then we would do an undiscounted cash flow analysis. The undiscounted cash flows exceed the NBV, so
BUT if not, then we would estimate fair value (probably by discounting the cash flows) and record the impairment.
(C ) Fixed assets just like we treat definite lived intangibles. We will assume that no "events or change in circumstance"

STEP 1: Compare to fair value of reporting unit.

If fair value of the reporting unit is $2.8 million, step one passed and we are done.

BUT if the fair value of the reporting unit is $2.5 million, we have a problem and have to do step 2

STEP 2: Compute "implied fair value of goodwill"

Net assets of reporting unit, excluding goodwill 1,790,000

Fair value of reporting unit 2,500,000
Implied fair value of goodwill 710,000

COMPUTE IMPAIRMENT:
Goodwill on books 900,000
Implied fair value -710,000
GOODWILL IMPAIRMENT 190,000

ENTRY:
Impairment expense 190,000
Goodwill 190,000
s overvalued by $10k
e had been no change, then stop. But
ows exceed the NBV, so we are done.
e impairment.
ge in circumstance"