Impairment Goodwill

Question 1

US GAAP:

At what type of unit to evaluate goodwill?

Impairment goodwill - how it’s done?

Answer 1

Impairment test is done on the Reporting Unit

use the two step method:

Step 1) FV of reporting unit - CV of same reporting unit = if negative number, then goodwill is impaired

Step 2) Implied fair value - Goodwill BV = impaired loss

Implied fair value = excess leftover of FV assigned to reporting unit’s assets and liabilities.

or implied fair value = the same negative result from (reporting unit FV - reporting unit CV)

Question 2

Example of impairment goodwill calculation:

Alpha has $50,000 Goodwill
Beta has $75,000 goodwill

Alpha reporting unit has $500,000 Book value (carry value)
Beta reporting unit has $675,000 book value (carry value)

Alpha reporting unit has Fair value = $480,000
Beta reporting unit has fair value = $700,000

What is the goodwill impairment loss from this example?

What is the journal entry for this example?

Answer 2

Step 1) Goodwill FV - Goodwill BV

Alpha: $480,000 FV - $500,000 BV = -$20,000
Beta: $700,000 FV - $675,000 BV = $25,000

Alpha has negative amount = it’s goodwill impaired
Beta has positive amount = no impairment

Step 2) Goodwill impairment on Alpha

Alpha: $480,000 FV - $20,000 negative difference = $460,000 assigned to all assets/liabilities in Alpha

Then: $460,000 - $480,000 = $20,000 implied good will

Alpha: 20,000 implied goodwill FV - $50,000 goodwill BV = -$30,000 impairment loss

Journal entry
——————-

Dr. Loss due to impairment loss $30,000
Cr. Goodwill $30,000

Question 3

IFRS: how to calculate goodwill impairment?

What unit is used to evaluate goodwill impairment?

Once find impaired goodwill loss amount, how to allocate it?

Answer 3

It’s the same method as Impairment on tangible/intangible asset.

One step method: Recoverable amount - Carry value = impairment loss

• recoverable amount = Pick bigger number
• -> (FV - costs to sell)
• -> (PV CFLO)

Unit to test impairment (IFRS): Cash generating unit (CGU)

Allocating goodwill impairment loss: Allocate the impairment loss to Goodwill
Then; Allocate on pro-rata basis to CGU’s other assets

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Question 4

What is the difference between Reporting unit (GAAP) and Cash generating unit (CGU)?

Answer 4

Reporting unit (US GAAP): it’s an operating segment or a level below operating segment

Cash generating unit (CGU): smallest identifiable group of assets that generates large cash inflows, independently larger than other assets or asset groups’ cash inflows