Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. While it adds value to a company's balance sheet, it is subject to potential impairment, necessitating careful accounting considerations. Goodwill impairment accounting involves assessing whether the carrying amount of goodwill exceeds its recoverable amount and recognizing impairment losses when necessary.

Key Principles of Goodwill Impairment Accounting:

Impairment Testing: Goodwill is tested for impairment at least annually or more frequently if there are indicators of potential impairment. Indicators may include adverse economic conditions, changes in market conditions, or internal factors affecting the company's performance.

Two-Step Impairment Test: The impairment test involves a two-step process. In the first step, the carrying amount of the reporting unit (including goodwill) is compared to its fair value. If the fair value is determined to be less than the carrying amount, the second step is performed to measure the impairment loss.

Measuring Impairment Loss: The impairment loss is calculated as the difference between the carrying amount of the reporting unit's goodwill and its implied fair value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination.

What is the primary purpose of the two-step impairment test in goodwill impairment accounting?

 

Answer rating: 100% (QA)

The primary purpose of the twostep impairment test in goodwill impairment accounting is to identify ... View the full answer