Question

In 2018, Amazon acquired Kohls for $1,200 million when the fair value of net assets (assets minus liabilities) of Kohls was $955 million. At the end of 2019, the net assets including goodwill, from Amazon's acquisition of Kohls had a book value of $720 million. At this date the fair value of Kohls was assessed to be $700 million, while the fair value of Kohls excluding goodwill was assessed to be $550 million. Calculate the impairment loss that Amazon should record for goodwill at the end of 2019.

Answer 1

Solution:

The impairment loss that Amazon should record for goodwill at the end of 2019 is $ 20 (Millions) or $20,000,000

There are two Steps in the calculation of goodwill

Step 1: Fair Value of Kohls is less than the carrying value

Particulars	Amount(in Millions)
Fair Value of Net Assets ,2019	$                         700.00
Carrying Amount 2019	$                         720.00

Yes, Here fair value is less than carrying value. So, Step 2 is required.

Step 2: Calculation of impairment loss

Particulars	Amount(in Millions)
Fair Value of Net Assets ,2019	$                         700.00
Less: Carrying Amount 2019, Excluding Goodwill ( $ 720- $ 245)	$                         475.00
Implied Goodwill	$                         225.00
Carrying Value of goodwill	$                         245.00
Loss on Impairment	$                            20.00

Note:

1) Even though fair value of Kohls excluding goodwill has given but we should not take that into consideration in calculation of goodwill.

2) Carrying Amount of net assets excluding goodwill ( $ 700- $ 245) is $ 245 (Millions). Goodwill does not changes every year like amortization for other intangible assets unless there is impairment loss. So, we considered 2018 goodwill balance as 2019 goodwill balance

Calculation of Goodwill at the time of acquisition.2018
Particulars	Amount(in Millions)
Acquisition Cost	$                      1,200.00
Less: Fair Value of Net Assets	$                         955.00
Goodwill	$                         245.00