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CPA FAR Exam Changes, January 2020 – Goodwill Impairment

Goodwill is the direct result of a business combination. Sometimes referred to as “purchased goodwill”, Goodwill is the excess of the implied fair value of the subsidiary as a whole compared to the fair value of identified net assets (assets – liabilities) of the subsidiary. Example: If Potter Corp purchases 100% of Stove Corp and pays $600,000, how much goodwill should be recorded if Stove Corp has net assets of $670,000 and there are no undervalued assets on the books of Stove Corp at the date of acquisition? Answer: $670,000 minus $600,000 = $70,000 of goodwill. Usually on the CPA Exam in a question on business combinations, an asset such as inventory was undervalued by $30,000 on the books of Stove. If that is the case, $70,000 of goodwill would be reduced by the $30,000 undervalued asset and just $40,000 of goodwill would be recorded. Goodwill is the asset that is not identifiable at the time of purchase, and usually the result of an excellent supply chain, management team, synergies expected from the combination. Goodwill is not amortized but is tested for impairment at least annually. Impairment exists when the carrying amount of the subsidiary or “reporting unit” exceeds its fair value. In testing for goodwill impairment, management considers qualitative factors such as decline in the market demand for the entity’s products or services, possible regulatory developments such as in the vaping industry, cost factors such as raw material increases, increasing labor costs, negative cash flows from operations, actual or projected declines in revenue. Companies have the option of performing a qualitative assessment of goodwill impairment; however, if a company performs a qualitative assessment of its goodwill and fails, it must proceed with quantitative impairment. Example of a Quantitative Test for goodwill impairment:

Unit Carrying Value Unit Fair Value Goodwill Impairment
$95,000 $105,000 $12,000 None

Unit Carrying Value Unit Fair Value Goodwill Impairment
$95,000 $105,000 $12,000 None
$105,000 $100,000 $12,000 $5,000

Journal Entry to record loss on goodwill impairment:

DR Loss on Goodwill Impairment $5,000 (IS)

CR Goodwill      $5,000 (BS)

Unit Carrying Value Unit Fair Value Goodwill Impairment
$95,000 $105,000 $12,000 None
$105,000 $100,000 $12,000 $5,000
$105,000 $90,000 $12,000 $12,000*

*Note that the goodwill impairment initially appears to be $15,000 ($105,000 -$90,000) but is limited to the prior carrying amount of the goodwill which is $12,000.

DR Loss on Goodwill Impairment $12,000

CR Goodwill $12,000

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