Introduction
Goodwill and impairment is very well related in accounting concept, impairment is a concept in accounting that explains stable reduction in value of asset (Dauang-ploy,O.,Shelton,M.,&Omer,K.,2005). To calculate impairment loss it is essential to de-cide the amount of value in use, and this involve the calculation of the cash flows which are supposed to be produced from the use of assets. Goodwill can only be recognised when it is obtain in business combination.
Impairment
Impairment is a concept in accounting that explains stable reduction in value of asset.
Total profit and cash flow are expected to be produce by certain asset which is occa-sionally contrasted with book value. If the book value is more than cash flow of the asset, the remaining amount should be written off and the value should be rejected from the balance sheet (Dauangploy,O.,et. al.,2005). If the carrying amount is more than recoverable amount, it can indicate the loss of impairment. Then the recover-able amounts need to be written down. There are two different models to recognise impairment, cost model and revaluation model. Impairment loss in cost model can be recognised directly in profit or loss. In revaluation model asset is measured in its fair value and impairment loss is recognised as descending revaluation.
Impairment loss, Cash Generating Unit¬¬¬¬¬¬
To calculate impairment loss it is essential to decide the amount of value in use, and this involve the calculation of the cash flows which are supposed to be produced from the use of assets. Though, some assets don’t produce cash flow by itself. This is the reason why the cash flow is increasing due to the combination of few assets together. In other word, car used by sales person does not produce cash flow by itself (Sun,L., & Zhang,J.,2017). When the asset can not generate cash flow by itself it is necessary to group them and it is called “cash generating unit”. Cash generating unit is the smallest recognisable group of assets that brings cash inflow.
At the end of the period after identifying what is Cash Generating unit is, manage-ment need to figure out if impairment is occur or not. If there is possibility of impair-ment, calculation of recoverable amount of the
Section 360-10-35-17 of the Code states that an impairment loss shall be recognized if the carrying value of a fixed asset is not recoverable and exceeds its fair value. The carrying value of the fixed asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and disposal of the asset. An impairment loss shall be measured by the amount by which the carrying value exceeds the fair value.
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.
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.”
As discussed above, if indicators of impairment exist for an asset (group) to be held and used, an entity determines whether the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question is less than its carrying amount. If those undiscounted cash flows are less than
IAS 36-2 states the Impairment of Assets rule shall be applied in accounting for the impairment of all
• What impact should the potential foreclosure and extinguishment of debt have on the cash flows used to perform the recoverability test?
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
4. ASC 360-10-35-23 provides that “[f]or purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities…”
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.
The authoritative guidance for asset impairment is to ensure that impairment is recorded and dealt with as depreciation. The scope of the standard is writing off of assets and depreciation. According to the guidance of 360-10-35, it address how long-lived assets that are intended to be held and used in an entity’s business shall be reviewed for impairment. The impairment loss can only be recognized if the carrying amount of a long-lived assets is not recoverable and
If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value.
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.
Ida should measure the impairment loss as the amount that the carrying value of the building exceeds its fair value (ASC 360-10-35-17). Ida’s impairment loss for the commercial building is $600,000 (the carrying amount of the building- $4,500,000 minus its fair market value- 3,900,000).
In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There
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