What is Goodwill Impairment?
Goodwill impairment is defined as the difference between the book value of goodwill and the implied fair value of goodwill. Unlike other assets, goodwill cannot be defined as a stand-alone asset and must be valued as a residual of all other assets. Therefore, the estimation of goodwill impairment is not as simple as measuring the difference between market capitalization and net book value. There is a greater emphasis on asset valuation. Therefore, it is critical for any goodwill impairment analysis that the valuation firm has a thorough knowledge of tangible and intangible asset valuation methodology.
The assessment of goodwill impairment is a subjective process, especially initially. To help ensure the accuracy of your testing, let the experts at Appraisal Economics help. For more information, please follow this link: Goodwill Impairment Valuation.
Goodwill Impairment Testing
Businesses must perform the Goodwill Impairment Test on an annual basis (with certain exceptions) under ASC 350 (formerly FASB 142). This testing process must be conducted at the reporting unit level, defined as the lowest level of an entity, i.e., business units, subsidiaries, operating units, divisions, etc. There are two steps to the testing process:
First, businesses must identify potential impairments by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Goodwill impairment does not occur as long as the fair value of the unit is greater than its carrying value. The second step of the test is only required if a goodwill impairment is identified in step one.
The second step of the test compares the implied fair market value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value, and it must be presented as a separate line item on financial statements.
Experienced Goodwill Impairment Services & More
At Appraisal Economics we have the personnel, experience and research resources required to provide the kind of goodwill impairment testing that will stand up to SEC scrutiny. An opinion from Appraisal Economics is the product of a comprehensive analysis that takes into account all areas of concern to the SEC.
For more information on our full range of services, please visit our Range of Services Page. Or follow this link for more information regarding our goodwill impairment assessment process.
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