2. What are the three steps to goodwill impairment test and are they optional?

Expert Solution

Three steps to Goodwill impairment test -

1. Evaluate whether the carrying amount of goodwill as appearing on the balance sheet exceeds its fair market value. This can be analysed by considering certain internal and external factors such as technology obsolescence, political changes etc. If it is concluded that carrying amount of goodwill exceeds it's fair market value, then further testing will be conducted.

2. Calculate and compare the fair value of the business operating unit of a goodwill with that of carrying amount of goodwill.

If carrying amount of goodwill < fair value of the business operating unit = No further testing.

If carrying amount of goodwill > fair value of the business operating unit = Further testing required.

3. In this third step, value of individual assets and liabilities of the reporting unit is calculated and then finally comparing it with the value of goodwill. The difference between carrying amount of goodwill less fair value of business unit is called as an IMPAIRMENT OF GOODWILL.

Goodwill impairment test is optional only for private companies. Private companies would conduct goodwill impairment test only when they are satisfied that certain factors has led to the change in the fair value of goodwill.

ekkarill92 answered 10 months ago

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