![]() ![]() ![]() Rising interest rates, valuation reductions, increased costs.Planned or announced closures, layoffs, restructuring, or dispositions.Negative current events or outlooks for industry impacting company holistically or specific reporting units.Cash flow issues or operating losses at the reporting unit level.Example of such triggering events could include these, among others: Interim tests for goodwill impairment are required when events or circumstances change – triggering events – that, more likely than not, would reduce the fair value of a reporting unit below its carrying value. It's important to note that GAAP requires a company to assign all of its goodwill to its reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis. The topic du jour, goodwill impairment testing, is the mechanism that determines the amount of that accounting charge. Goodwill impairment exists when the fair value of your reporting unit drops below its carrying value. But if you don't amortize goodwill assets like intellectual property, for instance, or depreciate it like plant equipment, then how do you make sure your recorded goodwill is recoverable? You guessed it – goodwill impairment. Long gone are the days when US GAAP allowed public companies to amortize goodwill like they do long-lived assets and indefinite-lived intangible assets. Further, goodwill is tied to those synergies and the presumption that the acquired business will continue to operate, generate cash flows, and provide value to the investors, owners, and other stakeholders. In the case of goodwill, it provides a place for companies to report the value of items like brand reputation, employee relations, and other synergies.įor example, if company A acquires company B for $500 million, but the net value of company B's assets, including identified intangible assets, is only $400 million, then that $100 million paid over the net value is considered goodwill. That's where intangible assets like goodwill come into play. Brand reputation, recognition, and loyaltyĪll of these items have value, but not in the same way that tangible assets like PP&E, cash & cash equivalents, and the other "traditional" assets do.The more you know, right?Īnyway, why would a company ever pay such a premium in the first place, you ask? Well, for starters: Put another way, it's the amount paid above the cumulative net value of the acquired business’s assets.Īs a quick aside, the IFRS definition of goodwill is similar to that of US GAAP, just with the latter permitting more intangible assets and, thus, reducing the amount of goodwill a company recognizes. Translating that definition into ordinary language, goodwill is an intangible asset that represents the price premium one company pays when acquiring another. Quite the mouthful, huh? And somewhat nebulous to boot. Per ASC 350, the FASB defines goodwill as:Īn asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. To state the obvious, any discussion around the impairment of goodwill should begin with a thorough understanding of the underlying concept – goodwill. Ultimately, goodwill impairment is necessary to provide clarity for stakeholders and an accurate assessment of value. After all, goodwill itself isn't the type of asset that you can really sink your teeth into like a good ol' fashioned widget-making machine or stacks of cash.īut just because the fine folks at the Financial Accounting Standards Board (FASB) classify goodwill as an intangible asset doesn't mean it's any less important to your balance sheet as other line items in the same financial reporting neighborhood. Sure, some of the confusion around the guidance is valid. Goodwill impairment is one of those accounting terms that's more bark than bite. ![]()
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