How to Test for Impairment of Goodwill?

Impairment of Goodwill or impairment of goodwill loss informs about the destruction in this intangible asset. So, Financial Accounting Standards Board (FASB) has made rules 141 and 142 which explain about this. We know goodwill is important part of total value of company. If any company acquires any other company, then it sees whether goodwill has impaired or not because it affects the acquisition value. So, to do the test for impairment of goodwill is very important for any accountant.

It has following simple steps:

1st Step: To Compare Fair Market Value of net assets with book value of net assets

This is the first step to test for impairment of goodwill. In this step, The fair market value of the reporting unit is calculated. This valuation is done as of a specific date and must be repeated annually at the same time each year.

a) When there is no impairment

If fair market value of net assets > carrying value or book value of net assets.

If the fair market value is equal to or greater than the unit’s carrying value, then goodwill of the reporting unit is not considered to be impaired. Thus, step 2 of the impairment test is not necessary.

b) When there is impairment loss

If fair market value of net assets <  carrying value or book value of net assets

if the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any.

2nd Step : Compare Book value of Goodwill with Fair Market Value of Goodwill

In this step, the implied fair market value of goodwill is estimated and compared to the carrying value or book value of goodwill for the reporting unit. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss equal to this excess is recorded. The recorded loss cannot exceed the carrying amount of goodwill.

You can also thorough study of steps to Test for Impairment of Goodwill with example in the PDF file of at http://www.axiomvaluation.com/Documents/2004.04.27-GoodwillImpairmentPrimer.pdf