Question

Assume that on January 1, 2017, Shimul formed Shaheen Corporation to consolidate the operations of Adora, Inc. and Alvah, Inc., in a deal valued at $2.2 billion. Adora comprises two divisions—Tanim Space and Archie Robotics—that along with Alvah, Inc. are treated as independent reporting units for internal performance evaluation and management reviews. Shaheen recognized a total of $300 million as goodwill at the merger date of which $22 million, $240 million, and $38 million were allocated to Tanim Space, Archie Robotics, and Alvah, Inc. respectively.

The acquisition date fair value of Archie Robotics was $748 million that has fallen to $600 million at December 31, 2017, the date Shaheen assessed annual goodwill impairment. Shaheen attributed the decline in value to a failure to realize expected cost-saving synergies with Alvah, Inc. At December 31, 2017, Archie Robotics’ identifiable net asset value was $595 million. Should Shaheen recognize goodwill impairment for 2017, if so, how much? Show all calculations to receive any points.

Answer 1

Goodwill is created in business accounting when an acquiring entity purchases another entity for more than the fair market value of its assets. Per accounting standards, goodwill should be carried as an asset and evaluated yearly for any possible goodwill impairment charge. Private companies may be required to expense a portion of the goodwill, periodically, on a straight-line basis, over a ten-year period, reducing the recorded value of the asset.

Companies should assess whether or not an adjustment for impairment to goodwill is needed within the first half of each fiscal year. This impairment test may have a substantial financial impact on the income statement, as it will be charged directly as an expense or written off until the asset of goodwill is completely removed from the balance sheet.

In accordance with both GAAP in the United States and IFRS in the European Union and elsewhere, goodwill is not amortized. In order to accurately report its value from year to year, companies do the impairment test. Impairment losses are, functionally, like accumulated depreciation.

Companies need to perform impairment tests annually or whenever a triggering event causes the fair market value of a goodwill asset to drop below the carrying value. Some triggering events that may result in impairment are adverse changes in the general condition of the economy, increased competitive environment, legal implications, and changes in key personnel, declining cash flows, and a situation where current assets show a pattern of declining market value.

There are two methods commonly used to test for impairment to goodwill:

Income approach – discounting estimated future cash flows to a single current value

Market approach – examining the assets and liabilities of companies in the same industry

In the current example of Shaheen Corporation, since on the acquisition date the fair value of Archie Robotics was $748 million that has fallen to $600 million at December 31, 2017 but the identifiable net asset value was $595 million.

That means the fair value of the assets which is $600 million is still more than the identifiable net asset value which is $595 million and hence        it is not mandatory for Shaheen Corporation to recognize goodwill impairment for 2017.

But is very evident from the current scenario that the fair value of Archie Robotics’s assets is falling down very drastically and hence it is prudent for Shaheen Corporation to recognize goodwill impairment for 2017.

Calculation for Goodwill Impairment
Particulars	Amount ($ Million)
The fair value of Archie Robotics on the acquisition date	$                          748
The fair value of Archie Robotics at December 31, 2017	$                          600
Reduction in the fair value	$                          148
Current Goodwill Value	$                          240
Less: Goodwill Impairment	$                          148
Net Goodwill Value	$                            92
#1 Impact on Balance Sheet
Goodwill reduces from $240 million to $92 million
#2 Impact on Income Statement
An impairment charge of $148 million is recorded, reducing net earnings by $148 million
#3 Impact on Cash Flow Statement
The impairment charge is a non-cash expense and added back into cash from operations. The only change to cash flow would be if there was a tax impact, but that would generally not be the case, as impairments are generally not tax-deductible.

Answer 2

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Ans :

What Is a Goodwill Impairment?

Goodwill impairment is an accounting charge that companies record when goodwill's carrying value on financial statements exceeds its fair value. In accounting, goodwill is recorded after a company acquires assets and liabilities, and pays a price in excess of their identifiable net value.

Goodwill impairment arises when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value.

Annual Test for Goodwill Impairment

U.S. generally accepted accounting principles (GAAP) require companies to review their goodwill for impairment at least annually at a reporting unit level.

1)Amount of goodwill on acquisition date : $ 240 million ( given )

2) Amount of goodwill Impairment loss :

Implied goodwill :-

Fair value on 12/31/2017 of archie                                                                  = 600 Million

Less : Fair value on 12/31/2017 of archie net assets ( excluding goodwill ) = 595 M

                                                                            Implied value of goodwill   = 5 M

Measuremnt of Impairment loss :

Book value of goodwill                   = 240 M

Less : Implied value of goodwill = 5 M

Impairment loss                          = 235 M

3) Journal entry :

Loss on impairment of goodwill Dr. $ 235 M

     To Goodwill                                          235 M