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 preparer, trying to figure out the goodwill resulting from the previous acquisition of Romeo Industries.
You've been briefed with the following facts:
- The reporting unit has a carrying value of $196.
- The goodwill associated with this reporting unit is $-8.
- This year's financials are:
This Year's Balance Sheet for the reporting unit Book Value Fair Value Marketable securities $465 $326 Current portion of long-term debt obligations $43 $45 Notes payable $30 $36 Unearned revenue $33 $42
What are the journal entries required for updates to goodwill?
Answer:
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 = $326 - LIABILITIES - Next, Let's plug in the fair values of the liabilities.
FAIR VALUE = $326 - $45 - $36 - $42 - Next, Let's do the math.
FAIR VALUE = $203 - Now we need to compare the carrying value to the present fair value.
$196 CARRYING VALUE VS $203 FAIR VALUE - Since the fair value is greater than or equal to the carrying value, there is no impairment.