Question

how does Goodwill Impairment report on the following:

1- The main provisions of the new pronouncements

2- How the accounting treatment of the new pronouncement differs from before

3- he effective date(s) of the new pronouncement

4- How the accounting treatment compares with IFRS

Answer 1

• Goodwill impairment is an accounting charge that is incurred when the fair value of goodwill drops below the previously recorded value from the time of an acquisition.
• Goodwill is an intangible asset that accounts for the excess purchase price of another company based on its proprietary or intellectual property, brand recognition, patents, etc., which is not easily quantifiable.
• Impairment may occur if the assets acquired no longer generate the financial results that were previously expected of them at the time of purchase.
• A test for goodwill impairment aligned with generally accepted accounting principles (GAAP) must be undertaken, at a minimum, on an annual basis

Goodwill Impairment

How Goodwill Impairment Works

Goodwill impairment is an earnings charge that companies record on their income statements after they identify that there is persuasive evidence that the asset associated with the goodwill can no longer demonstrate financial results that were expected from it at the time of its purchase.

Goodwill is an intangible asset commonly associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the net of the fair value of all identifiable tangible and intangible assets and liabilities assumed in the process of an acquisition. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

Because many companies acquire other firms and pay a price that exceeds the fair value of identifiable assets and liabilities that the acquired firm possesses, the difference between the purchase price and the fair value of acquired assets is recorded as goodwill. However, if unforeseen circumstances arise that decrease expected cash flows from acquired assets, the goodwill recorded can have a current fair value that is lower than what was originally booked, and the company must record

2.

First, the company compares the fair value of the reporting unit to its carrying amount (Step 1). If the fair value is lower, the company must then calculate any goodwill impairment charge by comparing the implied fair value of goodwill to its carrying amount (Step 2). Goodwill impairment may result if and only if the calculated implied fair value of goodwill is lower than its carrying amount. An impairment loss reduces the recorded goodwill and is irreversible.

The current guidance requires companies to calculate the implied fair value of goodwill in Step 2 by calculating the fair value of all assets (including any unrecognized intangible assets) and liabilities of the reporting unit and subtracting it from the fair value of the reporting unit previously calculated in Step 1. This process makes any goodwill impairment analysis costly and complex. Private companies can, however, elect to amortize the goodwill that they have acquired in business combinations on a straight-line basis over 10 years, or less if the entity demonstrates that another useful life is more appropriate, and can elect to use a one-step goodwill impairment test

Goodwill impairment charges under the new guidance may differ from the current guidance because the unit difference (carrying value of unit less fair value of unit) always overrides the goodwill difference (goodwill carrying value less goodwill fair value). Therefore, if the unit difference under the new guidance is higher or lower than the goodwill difference, it will replace the goodwill difference, which may create a higher or lower goodwill impairment charge. Furthermore, while some companies may not recognize any impairment under the current guidance when they fail Step 1, under the new guidance, if the carrying value of the reporting unit exceeds its fair value, there will always be some amount of goodwill impairment. Exhibit 1 reflects goodwill impairment alternatives under different scenarios.

3.Update 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

Public business entities that meet the definition of an U.S. Securities and Exchange (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. All other entities should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

4.

U.S. GAAP Treatment of Goodwill Impairment

U.S. GAAP (Statement of Financial Standard Accounting Board -142 business Combinations and 142- Goodwill and Other Intangible assets) laid down the rules for the accounting treatment of Goodwill in the books of account.

Under U.S. GAAP, the value of goodwill is recorded as the excess of the cost of an acquisition price over the fair value of acquired net assets. It will be recorded only when the carrying amount of goodwill exceeds its implied fair value. Before the new accounting standards, companies generally recorded the total amount of goodwill in the books and not assign the value of goodwill to the individual reporting unit of business.

A reporting unit is defined in the Statement of Financial Accounting Standard 142.30 as an operating unit or its component. Companies assign the value of goodwill to reporting units by comparing the estimated value of the operating unit with the fair value of the reporting unit’s identifiable net assets. There should be followed two-steps impairment to identify potential goodwill impairment as well as to measure the amount of impairment loss to be recognised if any.

Step 1:-Test for Impairment Goodwill

The companies should need to follow the first step to identify the fair value of the reporting unit that has goodwill.

Compare the fair value of the reporting unit with its carrying amount.

If the carrying value of the reporting units exceeds its fair value (carrying value > fair value), continue to the next step, else stop.

Step 2:- Measures the Amount of Goodwill Impairment Loss

For calculating the amount of impairment loss of goodwill the companies should follow the rules of accounting standard such as-

(a) Allocate the fair value of reporting unit step 1 to identifiable assets and liabilities of the reporting unit based on their current fair value;

(b) Allocate any excess fair value to goodwill;

(c) compare the amount allocated to goodwill In step 2(b) with the balance sheet carrying value of goodwill

(d) An organisation can recognize an impairment loss on goodwill by reducing the carrying value of goodwill to its fair value computed in step 2b.

Treatment of Goodwill under IFRS

Under IFRS, the value of goodwill is measured as the difference between recoverable amount over the balance sheet carrying value (including identifiable assets, liabilities and contingent liabilities).

An organisation requires the valuation of the fair value of all identifiable fair value of all tangible and intangible assets of the business for recognition of goodwill.

On the day of acquisition of goodwill, the impairment test is applied at the level of the cash-generating unit. The term cash-generating unit has been defined in IFRS. It is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets and the group of assets.

An organisation recognises an impairment loss if the recoverable amount of unit is less than the balance sheet carrying value.

As above the Same example proceed: –

Assets	Carrying value	Recoverable value
Land, Building, and Equipment (Tangible assets)	$15	$15
Brand names	$35	$25
Goodwill	$50	$20
Cash-generating unit	$100	$60

Philips recognises an impairment

loss of $40 million. Because the carrying value of the cash-generating unit exceeds its recoverable amount of $60 million.

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