Goodwill Impairment
Lesson:
When a company is purchased for more than it's worth on paper, the difference is put on the books as goodwill.
Goodwill, however, can disappear (though it can never increase).
When the fair value of a reporting unit drops below the carrying value of that reporting unit, an impairment occurs.
This impairment will drop the value of goodwill toward zero, but it may never drop below zero.
There used to be a more complex system for goodwill impairments, but the above system was introduced as a replacement via ASU 2017-04.
You're a tax accountant, trying to figure out the goodwill resulting from the previous acquisition of Romeo Industries.
You've been briefed with the following facts:
- The goodwill associated with this reporting unit is $34.
- This year's financials are:
This Year's Balance Sheet for the reporting unit Book Value Fair Value Marketable securities $463 $374 Cash $422 $457 Lease liabilities $31 $22 Pension obligations $49 $23 - The reporting unit has a carrying value of $823.
What are the journal entries required for updates to goodwill?
Answer:
-
Journal Entries for Goodwill Impairment Goodwill Impairment $34.00 Goodwill $34.00
Explanation:
- First, we need to figure out the current fair value of the net assets of the purchased firm.
FAIR VALUE = ASSETS - LIABILITIES - Next, Let's plug in the fair values of the assets.
FAIR VALUE = $374 + $457 - LIABILITIES - Next, Let's plug in the fair values of the liabilities.
FAIR VALUE = $374 + $457 - $22 - $23 - Next, Let's do the math.
FAIR VALUE = $786 - Now we need to compare the carrying value to the present fair value.
$823 CARRYING VALUE VS $786 FAIR VALUE - Since the fair value decreased below the carrying value, there might be an impairment.
POTENTIAL IMPAIRMENT = CARRYING VALUE - FAIR VALUE - Plugging in the numbers, we see:
POTENTIAL IMPAIRMENT = $823 - $786 - Solving the formula, we see:
POTENTIAL IMPAIRMENT = $37 - We need to see if there is any goodwill on the books, because we can't impair goodwill below zero.
GOODWILL = $34 - Because the potential impairment is larger than the amount of goodwill available, we can only apply an impairment equal to the goodwill. Remember, goodwill can never go below zero.
$37 POTENTIAL IMPAIRMENT VS $34 GOODWILL