Question

Jericho Company recently acquired three businesses, recognizing goodwill in each acquisition. The acquired goodwill was allocated to the three reporting units: Apple, Banana, and Carrot. Jericho provides the following information in performing the 2012 annual review for impairment.

		Carrying Value	Fair Value	Valuation of Reporting Unit (Including Goodwill)
Apple	Tangible Assets	$300,000	$320,000	$525,000
	Trademarks	20,000	10,000
	Licenses	85,000	90,000
	Liabilities	20,000	20,000
	Goodwill	130,000	?
Banana	Tangible Assets	$250,000	$400,000	$450,000
	Trademarks	25,000	50,000
	Licenses	18,000	18,000
	Goodwill	140,000	?
Carrot	Tangible Assets	$120,000	$120,000	$215,000
	Unpatented Technology	0	50,000
	Customer List	35,000	45,000
	Goodwill	75,000	?

Required:
A: Which of Jericho's reporting units require both steps to test for goodwill impairment?
B: How much goodwill impairment should Jericho report for 2012?

Answer 1

The two common methods used to test goodwill impairment are as under:
(a) Income Approach - In this method present value of future cash flows is estimated to
calculate the fair value of assets.
(b) Market Value Approach - In this method the assets are valued in comparision to the
market value of similar assets in the same industry.
If the market value of the assets as derived from the above two methods is lower than
the carrying value of the asset,impairment loss is recorded in the books so as to
present the assets of the company at their realizable value.
Goodwill Impairment = Carrying Value - Current Fair Market Value
While comparing the fair market value with the carrying value,goodwill and unrecognized
intangible assets should be included to calculate the carrying value.
A.
While referring to table above showing the carrying value and the fair market value of the
assets of the three units, we observe that carrying value of the assets of Carrot unit is
higher than the fair market value of the assets.Hence, the unit would require the both
steps to test goodwill impairment,which would be as under:
(i) Comparing the fair value of the reporting unit to its carrying value.If the fair value exceeds
then no impairment exists.Companies are not allowed to write up their goodwill
(ii) If the fair value is less than the carrying value,the company must perform the second step
by applying the fair value to the identiiable assets and liabilities of the reporting unit.The
excess balance of the fair values is the new goodwill and the carrying amount of the goodwill
must be reduced by booking a goodwill impairment charge.
	Carrying Value	Valuation of Unit	Remarks
Apple	$515,000	$525,000	Fair Value is higher,no impairment.No further steps required
Banana	$433,000	$450,000	Fair Value is higher,no impairment.No further steps required
Carrot	$280,000	$215,000	Fair Value is lower.Impairment exists.Perform the second step with identifiable assets
B.
Since,the fair value of Apple and Banana units is higher than their carrying value,there is no
requirement of carrying out the second step.
The fair value of Carrot unit is lower than the carrying value,hence we would carry out the
second step to account the identifiable assets at their fair value and charges the excess
balance of carrying value over fair value as the impairment loss
		Carrying Value	Fair Value	Goodwill Impairment
Tangible Assets		$120,000	$120,000	$0
Unpatented Technology		$0	$50,000	$50,000
Customer List		$35,000	$45,000	$10,000
Goodwill		$75,000	$0	($75,000)
Total Carrying Value		$230,000	$215,000	($15,000)
Note
(i) Fair value of goodwill has been taken as balancing figure( Valuation of Reporting Unit less:
Fair Value of identifiable assets) = $ 215,000 - ($ 120,000+$ 50,000+ $ 45,000) = $ 0
(ii) While comparing the fair market value with the carrying value,goodwill and unrecognized
intangible assets should be included to calculate the carrying value.
(iii) The maximum amount of goodwill impairment cannot exceed the carrying value
of the goodwill in the books.In this case,the impairment that needs to be recorded
is equal to the carrying amount of goodwill.If the impairment would have been
more than $ 75,000 then also the maximum amount of impairment loss would be
limited to $ 75,000
Jericho will record a goodwill impairment of $ 15,000 for 2012
After recording the impairment loss the assets of the three units would appear as under:
		Apple	Banana	Carrot
Tangible Assets		$300,000	$250,000	$120,000
Trademarks		$20,000	$25,000
Licenses		$85,000	$18,000
Unpatented Technology
Customer List				$35,000
Liabilities		($20,000)
Goodwill		$130,000	$140,000	$60,000
Total Carrying Value		$515,000	$433,000	$215,000