Question

A- Explain what is meant by Goodwill Impairment Test, and identify the main five events upon which goodwill undergoes a test for its impairment.

Answer 1

Goodwill Impairment it is a deduction from the earnings that companies record on their income statement after identifying that the acquired asset associated with the goodwill has not performed financially as expected at the time of its acquisiton

•Goodwill Impairment Test is required by US GAAP wherein the balance sheet goodwill should be valued at-least-once annually to check if the balance sheet value is greater than the market value and if there is any resulting impairment, then it should be written off as impairment charges in the Income Statement

•Goodwill can represent a large amount of a company's net worth, and acquisitions (especially in the age of technology) often involve the purchase of things that by and large are intangible. But overinflating goodwill can mislead investors, and simply amortizing goodwill (which used to be the procedure) can also create artificial values for the asset. To find a more accurate value and therefore provide more meaningful and accurate financial statements, companies must therefore test their goodwill by comparing the actual value of the assets in question to their recorded value and adjusting for the difference every year

•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

•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 valu