Accounting for Goodwill - Treatment of Goodwill Impairment

Accounting of Goodwill Impairment

In the past, goodwill could only gain financial statement recognition within the limited situation of staying purchased (i. e., internally generated goodwill has not been recognizable for financial reporting purposes).

After the decision to end the practice of amortized goodwill, it became necessary to produce a mechanism for making sure that the amount presented within the financial statements would certainly not exceed the goodwill’s projected fair value at any moment in time. This goal is generally in line with the rules underlying those governing the total amount sheet presentation of some other fixed assets.


However, any technique for testing for impairment will probably inevitably be confounded from the existence, along with this purchased goodwill, of internally generated goodwill created after the date of this company combination.

FASB concluded that it might be impossible to track “acquisition-specific” goodwill pertaining to impairment testing purposes and accordingly endorsed a serious departure from the standard prohibition against recognition connected with internally generated intangibles. This approach still results in a inconsistency, however, since only entities which may have purchased goodwill before will be permitted to understand the internally generated replacement goodwill in order to avoid impairment write-downs.

Entities that internally generate goodwill but which may have not entered into preceding purchase business combinations continue to be prohibited from capitalizing of which new goodwill and from presenting it just as one asset on their harmony sheets.

It concluded, providing the total goodwill identifiable while using the “reporting unit” to which usually acquisition-based goodwill was assigned can be shown to experience a fair value exceeding the book value in the goodwill arising from this acquisition (which means apples are to be compared with oranges), no impairment are going to be found. This represents a serious departure from prior human resources practice.

A reporting unit can be defined in current codification just as one operating segment or an element of an operating segment that is certainly one level below the operating segment in general. In order for a component to be considered a reporting unit it should:

Constitute a business (as defined in EITF 98); and
Have available discrete financial information regarding its operating results that is certainly regularly reviewed by message management.