Question

How do companies determine whether goodwill has been impaired? What valuation methods are available? Is this ever discussed by management in the financials? How might management minimize the impairment loss if one is reported? Consider the two steps of the process for determining impairment.

Answer 1

Determining Goodwill Impairment:

Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). This option allows entities to first assess these factors in order to determine whether a reporting unit’s fair value is more likely Lived Intangibles,” The CPA Journal, June 2014.) If a company fails this test or decides to bypass this step, it must proceed with the following two-step quantitative assessment of goodwill impairment.

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.

Methods Available for Valuation of Goodwill are:

1.Average Profit Method

2. Annuity Method

3. Super Profit Method

4.capitalization.

To measure the amount of the loss involves two steps: Perform a recoverability test is to determine if an impairment loss has occurred by evaluating whether the future value of the asset's undiscounted cash flows is less than the book value of the asset. If the cash flows are less than book value, the loss is measured.