FAR: Goodwill: 3/31/2018 Flashcards
Firm A purchased Firm B for $4,000 when B’s total owners’ equity was $2,000. Firm A completed the qualitative test for goodwill impairment and determined that it is more likely than not that goodwill may be impaired. B had one asset worth $500 more than the book value. One year after the purchase, Firm B’s total market value had dropped to $3,200 and the market value of its net identifiable assets was $2,000. What amount of goodwill impairment loss is recorded?
1) $0
2) $800
3) $400
4) $300
$300
The qualitative pre-step indicates the possibility that goodwill is impaired; therefore, the quantitative goodwill impairment test must be completed. Step one indicates that the carrying value ($4,000) is greater than the market value ($3,200), so step two must be completed. Step two measures the potential impairment loss. The implied goodwill is the market value of the reporting unit ($3,200) less the market value of the net identifiable assets ($2,000) or $1,200. The recorded goodwill is $1,500 (purchase price $4,000-fair value of net assets $2,500). The goodwill impairment loss is the implied goodwill ($1,200) less the recorded goodwill ($1,500) or $300.
If both an asset group and goodwill in one of a company’s reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?
1) The other asset group should be tested for an impairment loss before goodwill is tested.
2) Impairment testing may be conducted concurrently for the other asset group and goodwill.
3) If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment.
4) If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment.
The other asset group should be tested for an impairment loss before goodwill is tested.
When conducting goodwill impairment testing in a reporting unit, one must first determine the fair value of the identifiable net assets (assets minus liabilities). The fair value of the identifiable net assets is used to calculate implied goodwill to test recorded goodwill for impairment. The measurement of the fair value of the identifiable net assets is essentially measuring (and recognizing) any impairment in that asset group before the impairment testing for goodwill is completed.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
1) A patent.
2) Goodwill.
3) R&D costs for a patent.
4) A trademark with indefinite useful life.
A Patent
The recoverability test is applied to definite-life intangible assets. The patent is the only definite-life intangible asset listed. The impairment testing for goodwill is different from the impairment testing for definite-life intangibles. The first step of the impairment test of goodwill is to compare the carrying value of the reporting unit to the fair value of the reporting unit. If the carrying value is greater than the fair value, then the second step is required to measure any potential goodwill impairment.
Firm A is negotiating with Firm B to purchase Firm B and bring it into the corporate organization headed by Firm A. The two firms agree to the following:
Firm B’s average annual income is $900, to continue for 10 years after purchase.
Firm B’s total owner’s equity is $2,000.
Firm B’s market value of net identifiable assets is $3,500.
The average rate of return in B’s industry is 10%.
The risk adjusted rate of return for the purchase is 8%.
Compute the purchase price for B implied by this information. The present value of an annuity of $1 for 10 years at 8% is 6.71008, and at 10% is 6.14457.
1) $7,801
2) $8,197
3) $6,880
4) $7,191
$7,191
This answer is close but uses the present value factor for 10% rather than 8%. The 10% rate is the industry average rate of return and is used only to compute excess earnings, not for discounting. The amount to be used for discounting excess earnings is the 8% risk adjusted rate of return reflecting the risk inherent in the purchase.
When only a few assets (not a reporting unit) acquired in a business combination accounted for using the acquisition method are being tested for recoverability, all goodwill that arose from that transaction should:
1) Be allocated to all asset groupings using the relative fair values of long-lived tangible and intangible assets.
2) Be allocated to all asset groupings equally.
3) Be allocated equally to only those assets being tested.
4) Not be allocated to only part of a reporting unit..
Not be allocated to only part of a reporting unit..
According to ASC Topic 360-35-26, if some but not all of the assets acquired in a business combination accounted for using the acquisition method are being tested for recoverability, the goodwill that arose from that transaction shall not be allocated to the assets unless the asset group includes a reporting unit.
