M8 - Goodwill, Including Impairment

Question 1

Under IFRS, goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount. (true or false)

Answer 1

True,

An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss. This amount is first allocated to goodwill. Any remaining impairment loss would be allocated on a pro rata basis to the other asset of the cash-generating unit.

Question 2

US GAAP requires that goodwill be tested for impairment at the reporting unit level. (true or false)

Answer 2

True. The evaluation of goodwill impairment involves two major steps.

Step 1. Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill.

1a: Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units.
1b: Determine the FV of the reporting units and of the assets and liabilities of those reporting units.
1c: If the FV of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’s goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill).
1d: If the FV of a reporting unit is more than its carrying amount, there is no goodwill impairment and step 2 is not necessary.

Step 2. Measure the amount of goodwill impairment loss by comparing the implied FV of the reporting unit’s goodwill with the carrying amount of that goodwill.

2a: Allocate the FV of the reporting unit to all assets and liabilities of the unit. Any FV that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit.
2b: Compare the implied FV of the goodwill to the carrying value of the goodwill. If the implied FV of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.

Question 3

Goodwill should be tested for impairment at which of the following levels under IFRS?

Answer 3

Each cash generating unit

Question 4

Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit (CGU) is compared to the CGU’s recoverable amount, which is the (GREATER OR LESSER?) of the CGU’s FV less cost to sell and its value in use (PV of future cash flows expected from the CGU).

Answer 4

GREATER

Question 5

A company will perform impairment analysis and record necessary entries on all assets of the company prior to performing impairment analysis related to goodwill. (true or false)

Answer 5

true

Reporting units (segments) will be separately tested for impairment analysis. If the FV of a reporting unit is less than the carrying value, the impairment is assumed to be due to the goodwill as all other assets of the reporting unit would already have been properly adjusted.