Question

Identify the main five events upon which goodwill undergoes a test for its impairment. with explanation?

Answer 1

Goodwill impairment

Goodwill impairment occurs when the recognized goodwill associated with an acquisition is greater than its implied fair value. Goodwill is a common byproduct of a business combination, where the purchase price paid for the acquiree is higher than the fair values of the identifiable assets acquired. After goodwill has initially been recorded as an asset, it must be regularly tested for impairment.

Goodwill Impairment Testing

The examination of goodwill for the possible existence of impairment involves a multi-step process, which is:

1. Assess qualitative factors.
2. Identify potential impairment.
3. Calculate impairment loss.
4. A preliminary qualitative assessment.
5. Stage one of a quantitative assessment.

1. Assess qualitative factors. Review the situation to see if it is necessary to conduct further impairment testing, which is considered to be a likelihood of more than 50% that impairment has occurred, based on an assessment of relevant events and circumstances. Examples of these events and circumstances are the deterioration of macroeconomic conditions, increased costs, declining cash flows, possible bankruptcy, a change in management, and a sustained decrease in the share price. If impairment appears to be likely, continue with the impairment testing process. You can choose to bypass this step and proceed straight to the next step.

2. 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 assets. If the fair value is greater than the carrying amount of the reporting unit, there is no goodwill impairment, and there is no need to proceed to the next step. If the carrying amount exceeds the fair value of the reporting unit, proceed to the next step to calculate the amount of the impairment loss.

3. Calculate impairment loss. Compare the implied fair value of the goodwill associated with the reporting unit to the carrying amount of that goodwill. If the carrying amount is greater than the implied fair value, recognize an impairment loss in the amount of the difference, up to a maximum of the entire carrying amount (i.e., the carrying amount of goodwill can only be reduced to zero).

4. As its name suggests, a Preliminary Quantitative Risk Assessment (PQRA) is generally the first iteration of a risk assessment. ... However, if a PQRA suggests the potential for unacceptable risks, it does not mean that unacceptable risks are present.

5. Stage one of a quantitative assessment is based on facts and associated data. As mentioned above, it may not take into consideration the real sensitivity of one of your systems. Or when it comes down to ensuring that the criticality is factored into your calculations, it might be difficult. This is where a qualitative assessment comes in. A qualitative assessment takes into consideration less tangible factors and is based more on gut reaction than on hard facts and data. This isn’t to say that your gut reaction can’t be based on numbers you are aware of, but if there are factors that are difficult to quantify, you may rely on a feeling or instinct that will help you make a decision as to where you want to apply your limited resources to better protect the enterprise.