Goodwill is an intangible asset recorded on the balance sheet when one business acquires another business and when the purchase price, or carrying value, is greater than the fair market value. It includes the reputation, brand, geographic location, patents, employee commitments, and etc of the acquired company. Goodwill is calculated by deducting the carrying value from the fair market value of identifiable assets and liabilities. According to the FASB Accounting Standards Codification (ASB), which is the authoritative source for GAAP, if fair value is less than the carrying value, net identifiable assets, then there may be a potential impairment loss. (FASB ASC 350, 2013). Net identifiable assets typically include a summation of …show more content…
Finally, the standard also indicates that the component should be combined and treated as a single reporting unit in limited circumstances.
It is crucial to ensure that the reporting units are identified properly because testing impairment at the reporting unit level, versus testing another level, could result in dramatically different conclusions. For example, goodwill that does not appear to be impaired at the consolidated level, perhaps due to the strong performance of some segments, may offset the deteriorating performance of others. However, goodwill rose from the acquisition upon the poor performing segments, so testing that goodwill for impairment at the segment level might result in an entirely different conclusion.
ASC 350-20 specifically indicates that the impairment test should be performed on an annual basis. Importantly, the entity has the option of selecting the date in which they want to perform the test, which doesn’t have to be in its fiscal year end. But once the date is selected, the test should be performed at the same day in subsequent periods to avoid bottlenecks. In addition to performing the test on an annual basis, the test should be performed when every balanced circumstance indicates that the fair value of goodwill is less than its carrying value (FASB ASC 350, 2013). Finally, entities often perform impairment tests and have different assets with the same
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
Goodwill is considered impaired when the implied fair value of goodwill in a reporting unit of a company is less than its carrying amount, or book value, including any deferred income taxes. By qualitative factors, if the fair value is less than its book value (likelihood more than 50%), two step of the goodwill impairment test is necessary. According to ASC 350-20-35-2 and 3(A&B&D), if the company determines that it is not more likely than not that fair value is less than the book value, it does
vi) Goodwill- The beginning balance for Goodwill was determined by finding the difference between Total Assets and Total Liabilities at the beginning . Goodwill accounts for all the intangible assets that were transferred from the old company to the new company, including brand name, as well as a premium paid for the company. Goodwill was not amortized in this model.
Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.For the purposes of impairment testing, goodwill is allocated to each of the Group 's cash-generating units (CGUs), or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired.If the recoverable amount of the CGU (or groups of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups
If their stock price dropped to ZERO, an impairment would not be required because they are comparing the market price of their stock to their carrying amount of stockholder’s equity, which in a deficit. Also, the Company is anticipating those assets to produce future benefits that exceed its costs.
Where explain the concept of Intangible asset, which represents assets that absence of physical substance. Moreover, Goodwill represents an asset from which is expected future economic benefits, emerge from the acquisition of other assets or business combination. Another important point would be the impartments testing as refers ASC 350-20-35-28 where indicates that Goodwill of reporting unit must be tested for impairment annually. The test can be accomplished at any time in the fiscal year. In the case of different reporting unit, the impairment test could be at different times. This citation in the memorandum was provided incorrect (ASC 305-20-35-1 and 28) this encoding does not exist in FASB.
We will discuss whether the Company’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used is appropriate. This issue pertains to whether it is feasible to have a long-lived asset impairment without goodwill impairment.
* Test for recoverability — If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question to their carrying amounts (as a reminder, entities cannot record an impairment for a held and used asset unless the asset first fails this recoverability test).
Goodwill Impairment is the Goodwill that has become or is considered to be of lower value than at the time or purchase. From an accounting perspective, when the carrying value of the goodwill exceeds the fair value, then it is considered to be impaired. Negative publicity about a firm can create goodwill impairment, as can the reduction of brand-name recognition. Since the Financial Accounting Standards Board (FASB) first introduced its standards update on testing for goodwill impairment (ASU 2011-08), entities with goodwill on their balance sheet have had the option when testing goodwill for impairment to first assess qualitative factors as a basis for determining whether it is necessary to perform the traditional two-step approach described in ASC Topic 350. The optional qualitative assessment is commonly referred to as “step zero.”
Based on ASC 320-10-35-34 I mentioned above, the other-than-temporary impairment should be recoded as $28 ($100-$72) as of December 31, 20X1. On January 31, 20X2, when the price of the stock went up to $75, the other-than-temporary impairment should be recoded as $25 ($100-$75). If the share price was $95 instead of $75 on January 31, 20X2, I think no other-than-temporary impairment needs to be recorded, because there is no material decrease occurred.
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
According to Section 360-10-35-21, examples of events that would cause an asset to be tested for impairment include a significant decrease in the market price of a long-lived asset, or a asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, or asset group, and a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group.
Cisco allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired. The excess fair value of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Under the Section 360-10-35-21 in FASB Codification, a long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Following are some examples of events that would cause an asset to be tested for impairment (FASB Codification 360):
the asset or the market price, which may differ considerably from their original purchase price. ▫ Four broad categories: liquid assets, investments, real property, and personal property.