What is the concept of goodwill impairment in accounting?

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by bell , in category: Taxation and Accounting , 9 months ago

What is the concept of goodwill impairment in accounting?

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1 answer

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by mikel , 9 months ago

@bell 

Goodwill impairment is a term used in accounting to describe the decrease in the value of a company's goodwill asset. Goodwill arises when one company acquires another company for a price higher than the net value of its identifiable assets. It represents the intangible value, such as the reputation, brand recognition, customer relationships, and intellectual property, that a company possesses.


However, the value of goodwill is not static and may change over time due to various factors, such as changes in market conditions, negative events affecting the company's reputation, or loss of key personnel. When the fair value of the reporting unit, which is the level at which goodwill is assessed, falls below its carrying value (the recorded value on the balance sheet), the company is required to recognize a goodwill impairment.


To determine the amount of goodwill impairment, the company must perform a two-step impairment test. The first step involves comparing the fair value of the reporting unit to its carrying amount. If the carrying amount exceeds the fair value, then the second step is performed, which calculates the amount of impairment by comparing the implied fair value of goodwill with its carrying amount. The implied fair value of goodwill is determined by deducting the fair values of the reporting unit's tangible and identifiable intangible assets from its fair value.


Goodwill impairment is recorded as an expense on the income statement, reducing the company's net income for the period and reducing the value of the asset on the balance sheet. It is essential for companies to regularly assess the value of goodwill and recognize impairment in a timely manner to accurately reflect its true value and financial performance.