Goodwill should be adjusted for impairment when the value of the acquired assets falls below what the company generally paid for them. Goodwill is classed as an asset although it does not amortize or depreciate like other assets. Many acquisitions in today's market involve the purchase of things that are intangible. This has created a higher possibility of company's over inflating goodwill on financial statements which could mislead investors. Goodwill is created when a company acquires another company at a price that is higher than the fair market value of its assets. This amount is listed on the purchasing company's balance sheet as goodwill. GAAP rules require companies to test goodwill every year for impairments. In the past, goodwill was amortized. Overinflated goodwill can mislead investors. To help protect investors, it is now required that companies compare the actual value of the assets (assets involved in the goodwill transactions) to their recorded value and adjust for the difference every year. Goodwill can represent a large amount of a company's net worth so their true value is very important and could possibly skew the financial statements. To help prevent this and to provide more meaningful and accurate financial statements, the test of goodwill requirement was put in place.

Response with 50-60 words to the topic above. Give your opinion, your thoughts, or comment.

Answer rating: 100% (QA)

I agree with the importance of testing goodwill for impair... View the full answer