Question

What does goodwill represent? Under SFAS 142, we are required to test goodwill for impairment at least annually. How is this done? Is impairment of goodwill reversible under U.S. GAAP? How about under IFRS? (Refer to FASB Topic 350, "Intangibles-Goodwill and Other," and IAS36 "Impairment of Assets.")

Answer 1

Goodwill is an intangible asset associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value of all identifiable tangible and intangible assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

Testing goodwill for impairment requires two steps under U.S. Generally Accepted Accounting Principles (GAAP). First, you must estimate the fair value of the company (or reporting unit if multiple product lines or divisions exist). If book value exceeds fair value, goodwill impairment has likely occurred.

Under the second part of the test, you must allocate fair value to the tangible and identifiable intangible assets. What is left over is the implied fair value of goodwill. Once the book value of goodwill has been written down to its fair value, GAAP prohibits you from reversing impairment losses, even if the value eventually recovers

An impairment loss for goodwill is never reversed. For other assets, when the circumstances that caused the impairment loss are favourably resolved, the impairment loss is reversed immediately in profit or loss (or in comprehensive income if the asset is revalued under IAS 16 or IAS 38)