In: Accounting
Q3. On January 1, 2016, ATM Corporation acquired all of the common stock of ZED Company for $300,000. On that date, ZED's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of ZED are considered to be a separate reporting unit of ATM Corporation. The carrying value of ZED's investment at December 31, 2016, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000.
Required:
1) Explain how goodwill is tested for impairment for a reporting unit.
2) Determine the amount, if any, of impairment loss to be recognized at December 31, 2016.
(a)
Impairment refers to the reduction in the value of asset due to negative change in the external environment of the entity. Impairment occurs when the market value is less than the recorded value (in the balance sheet) of the asset.
Impairment Recognition: The entity should test for impairment loss when there are indicators for impairment. Some of the indicators that may lead to an impairment of the asset are:
The goodwill must be tested for impairment annually. Acquired goodwill and other indefinite-lived intangible assets should be reported in balance sheet at fair value. Testing for impairment is required when a ‘triggering event’ (such as the economic or legal factors, loss of a key customer or unanticipated competition) occurs that could reduce the asset’s value.
Following steps are followed for testing and calculating of goodwill impairment:
(b)
On January 1, 2016
Cost of investment at the fair value of consideration given BY ATM $300000
Less ATM’S share of the fair value of the net assets of ZED $ 250000
Goodwill attributable to ATM on 1 Jan, 2016 $ 50000
On December 31, 2016
The fair value of the reporting unit = $260000
Carrying value of the reporting unit = $310000
Because the fair value of the reporting unit ($260000) is lower than its carrying value ($310000), there is impairment of $50,000 in the operating unit, which should be first written off against goodwill of $50000 recorded in the books.