Northrop Grumman Corporation is a leading global security company that provides innovative systems products and solutions in aerospace, electronics, information systems, shipbuilding, and technical services to government and commercial customers worldwide. In an early 2009 press release, Northrop reported that it would record a non-cash, after-tax charge of between $3.0 billion and $3.4 billion for impairment of goodwill in its 2008 fourth-quarter income statement. As a result of the charge, Northrop reported net losses for the fourth quarter and all of 2008.
Northrop explained how it determined the impairment as follows: “The company performed its required annual testing of goodwill as of Nov. 30, 2008 using a discounted cash flow analysis supported by comparative market multiples to determine the fair value of its businesses versus their book values. Testing as of Nov. 30, 2008 indicated that book values for Shipbuilding and Space Technology exceeded the fair values of these businesses. . . . This non-cash charge does not impact the company’s normal business operations.”

Required
a. Explain how a company computes a goodwill impairment. Describe the usefulness of discounted cash flow and comparative market multiples in the computation of an impairment.
b. Explain the consequences of a goodwill impairment for the assessment of
(1) Current period profitability as measured by ROA,
(2) Future earnings projections, and
(3) Future period profitability as measured by ROA.