Question

Case study:

Client X contacted you for clarification and recommendations regarding the instances when goodwill should be adjusted for impairment.

•Provide detailed rational of why goodwill must be adjusted for impairment.

Please include sources

Answer 1

The treatment of impairment of assets is laid down in IAS 36. The impairment of assets including Goodwill is written off when recognized.

Goodwill impairment is a 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 value.

Source: https://www.google.co.in/search?q=impairment+of+goodwill&rlz=1C1CHBF_enIN769IN769&oq=impairment+of+&aqs=chrome.2.0j69i57j0l4.12475j1j7&sourceid=chrome&ie=UTF-8

The impairment amount will be the excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is the difference between the fair value of the reporting unit and the fair value of the assets and liabilities included in the reporting unit, which is a net amount.

Identify potential impairment. Compare the fair value of the reporting unit to its carrying amount. Be sure to include goodwill in the carrying amount of the reporting unit, and also consider the presence of any significant unrecognized intangible asset. This is a test for impairment of goodwill.

Generally, a goodwill impairment occurs when a company (A) pays more than book value for a set of assets (the difference is the goodwill), and (B) must later adjust the book value of that goodwill.

Every company will watch out for external and internal indicators of a possible impairment.

External indicators are: a significant decline in market value, significant adverse changes in technological, market, economic or legal environment, increase in market interest rates or rates of return, and the carrying amount of company’s net assets exceeds market capitalization.

Internal indicators are obsolescence or physical damage, the internal evidence available that asset’s performance will be worse than expected, significant adverse changes to the company including plans to discontinue or restructure an operation using the asset or to dispose of it earlier than planned.

Therefore, if the company finds any of these indicators, it should determine asset’s recoverable amount and find out whether there is impairment.

Identifying an asset that may be impaired At the end of each reporting period; an entity assesses whether there are any indicators of impairment for any asset in the scope of IAS 36. In addition to this requirement, the following assets are tested for impairment regardless of whether an indicator exists: • goodwill; • indefinite life intangible asset; and an intangible asset not yet available for use.

.Impairment of Goodwill occurs when its carrying value exceeds its value in use or market value. In other words, when the present value of future cash flows from the combination of assets including Goodwill is less than the carrying value of the combination including Goodwill, an impairment of Goodwill has occurred and should be provided for in the accounts.

Source: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/reporting-ifrsfactsheet-impairment-of-assets.pdf?la=en

If you want to be compliant with IAS 36, you have to perform the following procedures:

• You need to assess whether there is any indication that an asset might be impaired at the end of each reporting period.
  You don’t need to perform impairment testing if there’s no indication. However, you need to assess the existence of such an indication.
• If you hold some intangible asset with an indefinite useful life (such as trademarks) or intangible asset not yet available for use, then you need to test these assets for impairment annually.
• If your accounting records show some goodwill acquired in a business combination, you also need to test this goodwill for impairment annually.
• Source: http://www.ifrsbox.com/ias-36-impairment-assets/