A company is performing its annual impairment test for goodwill. The company has one reporting unit with a carrying amount (including goodwill) of $1,500,000. The fair value of the reporting unit is determined to be $1,200,000. The carrying amount of goodwill assigned to this reporting unit is $300,000. What amount of goodwill impairment loss should the company recognize?
- A$300,000
- B$0
- C$200,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: A. $300,000
Under the simplified goodwill impairment test (Step 1 only, per ASU 2017-04), if the fair value of a reporting unit is less than its carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, but the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. In this case, the fair value ($1,200,000) is less than the carrying amount ($1,500,000) by $300,000. Since this impairment loss of $300,000 does not exceed the goodwill's carrying amount of $300,000, the full $300,000 is recognized as an impairment loss.
Why the other options are wrong
- B. An impairment loss must be recognized because the fair value is less than the carrying amount.
- C. This might result from an incorrect calculation or misapplication of the impairment limit.
- D. This would be the impairment if the goodwill was $200,000, but it is $300,000.
Goodwill Impairment (ASU 2017-04)
Under ASU 2017-04, goodwill impairment is recognized when the carrying amount of a reporting unit exceeds its fair value. The impairment loss is limited to the amount of goodwill allocated to that reporting unit.
- Replaced the two-step impairment test with a single-step approach.
- Impairment loss = Carrying amount of reporting unit - Fair value of reporting unit.
- Loss is capped at the goodwill carrying amount for that reporting unit.
- Tested at the reporting unit level, annually or when impairment indicators exist.
Memory trick: Unit's value down, goodwill's crown.