F4 M8: Goodwill, Including Impairment
What is the qualitative impairment test for goodwill?
Allows companies to test qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test.
Omega Inc. has two reporting units, Alpha and Beta, which has book values including goodwill of $500,000 and $675,000, respectively. Alpha reports goodwill of $50,000 and Beta reports goodwill of $75,000. As part of the company's annual review for goodwill impairment, Omega determined that the fair values of Alpha and Beta were $480,000 and $700,000, respectively, at 12/31/1. Determine whether the reporting units' goodwill is potentially impaired.
Beta: Reporting unit FV - Reporting unit BV = $700,000 - 675,000 = $25,000 Beta's goodwill is not impaired. Alpha: Reporting unit FV - Reporting unit BV = $480,000 - 500,000 = ($20,000) Because Alpha's fair value is less than its book value, there is potential goodwill impairment.
How is impairment of goodwill evaluated under IFRS?
Done at the cash-generating unit (CGU) level. Compares carrying value of CGU with recoverable amount of CGU (recoverable amount is greater of FV less costs to sell and value in use).
Generally speaking, what is the definition of Goodwill?
Goodwill represents the intangible resources and elements connected with an entity that cannot be separately identified and reported on the balance sheet. Goodwill is capitalized excess earnings power.
When is the quantitative impairment test NOT necessary?
If, after assessing the relative qualitative factors, an entity determines that it is NOT more likely than not that the fair value of the reporting unit is less than its carrying amount.
How does Goodwill arise in a business combination using the acquisition method?
Under the acquisition method, goodwill is the excess of an acquired entity's fair value over the fair value of the net assets, including identifiable intangible assets.
When does goodwill impairment exist?
When the carrying amount of the reporting unit goodwill exceeds its fair value.
How is goodwill generated internally or not purchased in an arm's length transaction accounted for?
It is NOT capitalized as goodwill.
How are costs associated with maintaining, developing, or restoring goodwill accounted for?
They are EXPENSED and not capitalized as goodwill.
Under US GAAP, what level is goodwill impairment calculated at?
The reporting unit level.
In Step 2 (Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill) of the quantitative goodwill impairment test, what are the TWO sub-steps?
1. Allocate the fair value of the reporting unit to the assets and liabilities of that unit. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the unit. 2. Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.
In Step 1 (Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill) of the quantitative goodwill impairment test, what are the FOUR sub-steps?
1. Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the various reporting units. 2. Determine the fair value of the reporting units and of the assets and liabilities of those reporting units. 3. If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. 4. If the fair value of a reporting unit is more than its carrying amount, there is no goodwill impairment and Step 2 is not necessary.
What is a reporting unit defined as?
A reporting unit is an operating segment, or one level below an operating segment. The goodwill of one reporting unit may be impaired, while the goodwill for other reporting units may or may not be impaired.
What is the private company alternative available when accounting for goodwill?
Amortize goodwill on a straight-line basis over 10 years, or less than 10 years if it can demonstrate that another useful life is more appropriate. Make an accounting policy election, disclosed in the summary of significant accounting policies (SSAP) in the footnotes, to test goodwill for impairment when a triggering event occurs that indicates fair value may be less than carrying amount.
What are the two major steps in the quantitative evaluation of goodwill impairment?
Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill. Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.
How does Goodwill arise in a business combination using the equity method?
The equity method involves the purchase of a company's capital stock. Goodwill is the excess of the stock purchase price over the fair value of the net assets acquired.
