6/18/2021 Goodwill impairment testing — AccountingTools

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April 11, 2021

Accounting Books
What is Goodwill Impairment Testing?
Finance Books
Goodwill impairment occurs when the recognized goodwill associated with
an acquisition is greater than its implied fair value. Goodwill is a common Operations Books
byproduct of a business combination, where the purchase price paid for the
acquiree is higher than the fair values of the identifiable assets acquired. Send us your e-mail address to
receive monthly course
After goodwill has initially been recorded as an asset, it must be regularly
discounts
*
tested for impairment.

The examination of goodwill for the possible existence of impairment

involves a multi-step process, which is:
SUBMIT
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 these events and circumstances 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.

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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.

When to Conduct Impairment Testing

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. It may be necessary to conduct more frequent impairment
testing if there is an event that makes it more likely than not that the fair
value of a reporting unit has been reduced below its carrying amount.
Examples of triggering events are a lawsuit, regulatory changes, the loss of
key employees, and the expectation that a reporting unit will be sold.

The information used for an impairment test can be quite detailed. To

improve the efficiency of the testing process, it is permissible to carry

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forward this information to the next year, as long as the following criteria
have been met:

• There has been no significant change in the assets and liabilities

comprising the reporting unit.

• There was a substantial excess of fair value over the carrying amount
in the last impairment test.
• The likelihood of the fair value being less than the carrying amount is
remote.

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