when is a goodwill impairment loss recognized? This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you Intangible Assets Accounting (Goodwill Impairment Loss, Testing, Calculating & Recording). Following along are instructions in the video below:
“We re going to be looking at here is impairment of goodwill and we re re going to be testing and in this example recording a loss here on goodwill goodwill is created here when one company buys another. And it s really the excess of the purchase cost over the fair value of the net assets. Received. Here so we re going to look at this example here where corporation a will purchase corporation be here for seven hundred sixty thousand dollars and then it s agreed here between corp.
A and corp be that the land that they re buying here is undervalued by a hundred thousand dollars in the equipment is overvalued by ten thousand dollars. So what corporation a will be buying is the what s on the balance sheet. Here of corporation. Be so corporation b would have recorded its assets.
And it s the liabilities here at their book value. But we have to adjust or assess the fair value here for both the assets and liabilities here to determine the goodwill that s involved here so what we have to do is we have to adjust everything up to its fair value here. So the only changes. We d have here for the land the book value was one hundred and forty thousand dollars.
It was undervalued by a hundred thousand. So it s fair value would have to be adjusted up here to two hundred and forty thousand dollars. And then the only other adjustment was through equipment. It was overvalued by ten thousand dollars book was three hundred fifty thousand so we d have to adjust it down here to three hundred and forty thousand dollars.
So now we have determined the fair value here for our assets. And then we also have to determine a fair value for our liabilities. Sitting over here. But our book and our fair value are the same for this example.
So we have total liabilities of seven hundred thousand dollars and then going back to our assets here. If we total everything up at their fair value or new to a fair value of assets. Here was 1 million. Two hundred and forty thousand dollars.
So now knowing our purchase price here. Yeah. We can determine our goodwill here. So let s go down.
Again and again goodwill is the excess of the purchase cost over the fair value so we have to determine the fair value of the net asset. So it s really the assets here at their fair value less liabilities at their fair value so our assets at the fair value over 1. Million in 240000. Dollars.
That we were showing up. Here and then the fair value of the. Liabilities was. 700000.
So the difference gives us five hundred and forty thousand dollars. That s a fair value of the net assets now to determine the goodwill here. We know the price that was paid here by corporation aided by corporation b. Is seven hundred and sixty thousand dollars.
So looking at and then we would take the fair value the net assets and compare it to the price paid here fair veiled in net assets 540000. So the difference gives us goodwill here of two hundred and twenty thousand dollars. So we can go back up here. And really plug in our goodwill.
Here. And that s the original amount here at the purchase date of two hundred and twenty thousand dollars. So total assets. Plus goodwill total amount here would be 1 million.
Four hundred and sixty thousand dollars. Okay. Let s go down here. Again and look at recording goodwill.
Again. Remember goodwill is the excess of the purchase cost over the fair value of the net assets received here and to hear internally generated goodwill should not be capitalized three purchase goodwill is recorded only when the entire business is purchased in this case. The entire business was purchased corporation b. Or a purchased all of corporation b.
Here and point..
Four here goodwill is not amortized. It must be tested annually for impairment and written down. If it has decreased in value and recognized as an expense on the income statement. And this is what we re going to be doing here.
This is what we re going to be doing looking at the write down of the goodwill here because of an impairment and point. Five. Here you adjust goodwill carrying value only when it s impaired and just sits on the books. Here and you d only adjust.
It when you have an impairment here. So let s go look at our how we d calculate our impairment here. So impairment of goodwill is really a two step process step. One here first compare the fair value of the reporting unit to its carrying amount including goodwill here.
So you would be adding in the goodwill that was involved here into the carrying amount and what we re going to have to do here. We reassess this each year here. So we have to determine the fair each year here and also adjust for any carrying amount here each year here. And then the good will is what was sitting originally here in the account or what would be sitting in the account based off after any adjustments.
So first here if the fair value exceeds. The carrying amount of the net assets. Including good well then goodwill is not impaired and again remember we have to adjust their fair value or recalculate our fair value and our net assets each year here and be here. If the fair value were less than the carrying amount of the net assets.
Plus goodwill. Then you would perform the second step to determine any impairment here. So for example. Here.
Just say two years later here. We recessed this business unit be here. Let s say up to it s fair value of 1 million. Two hundred thousand dollars and then we it s carrying value we reassess that here recalculated that here to be 1 million.
Two hundred and seventy thousand dollars..
And that was really the net assets of 1 million. Fifty thousand dollars plus. The original goodwill that we had recorded here at two hundred and twenty thousand dollars. So you can see we have a loss here fair value is less than the carrying value here.
So now we can proceed here. Two steps to here. I am. And this is where we would be just taking and looking at a determine our implied value of goodwill here.
So we take the fair value of the reporting unit. Here at at this test. State here that was 1 million two hundred thousand dollars and then we would compare it to the net identifiable assets. Excluding good well.
This is where we wouldn t be including that two hundred and twenty thousand dollars in goodwill. We d be excluding it at this point. We d only be taking the net assets here less the goodwill. A 1 million.
Fifty thousand dollars. So you can see here. The goodwill here. The fair value is still greater than the net identifiable assets.
Here excluding goodwill. So we have implied value of goodwill here at one hundred and fifty thousand dollars. So now we can determine any loss on impairment here. So the implied value of goodwill here is one hundred and fifty thousand.
Dollars but the hearing amount a goodwill that we had originally here was. 220000. Dollars you can see we have a difference here of. 70000.
Value goodwill is less than the carrying amount hereby. 70000. So we haven t a loss here on impairment. So now we can record the loss of this goodwill impairment.
Again goodwill here is sitting on the balance sheet. In it s really a valuation account here so the original amount here was a debit amount here for two hundred and twenty thousand dollars and now we have to recognize this loss here. So we d be credit cracking in our goodwill account here for seventy thousand dollars. So that leaves us a balance here of one hundred and fifty thousand dollars in our on our goodwill account.
Here and our valuation account here for goodwill. Now we recognize this impairment loss here for goodwill on our income statement. So we d be debiting that here for seventy thousand dollars alright. So we have taken care of this we ve had a loss here on our on an impairment of goodwill and we recorded it so let s just go over this process here.
One more time this two step process first compared to fair value. The reporting unit. And remember you have to reassess whatever. The fair value is at the date that you re doing your is annual test here.
And then you would again compare to fair value. The reporting unit and the carrying amount to that has to be readjusted for whatever the carrying amount including the goodwill well the goodwill was in this case is what was sitting on the books. We hadn t changed any of that but you would include the goodwill here now if the fair value exceeds the carrying amount of net assets including goodwill then goodwill is not impaired. But if the opposite is true here or fair value is less than the carrying amount of net assets again plus goodwill then you perform the second test here and that s simply just looking at here.
You have to determine your implied fair value of goodwill. That s the fair value of the reporting unit. And compare that that and netta fight net identifiable assets. Excluding goodwill.
Yet it can include the goodwill here you just take the new value a new carrying value here of your assets and your liabilities. And that will give you the implied value of goodwill and then you just simply compare that to whatever the carrying amount of will is here. So. If the implied amount here is less than the carrying amount and you would have a loss and then you d go and recognize that loss here both to your goodwill account you would have to adjust that here for the impairment and you d also are recognize an impairment loss here on your income statement debit that by the amount here of the loss on an impairment all right so that takes care of our goodwill testing and an ” .
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