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FVG's E-Newsletter on tax cases concerning business valuations and related issues
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- Royalty Rates
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and NAICS Codes
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Managing Directors
Terry J. Allen
Midwest
Stephen J. Bravo
Boston, MA
Michael
A. Crain
Ft. Lauderdale, FL
John R. Gilbert
Great Falls, MT
Steven D. Hyden
Tampa, FL
Robert Lanz
Silicon Valley, CA
Michael J. Mard
Tampa, FL
Michael J. Mattson
Chicago, IL
John J. Mayerhofer
Oakland, CA
Ralph
Ostermueller
St. Louis, MO
Charles H. Preston
Los Angeles, CA
James S. Rigby
Los Angeles, CA
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Founding Member
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Group, L.C.
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Goodwill
Impairment Testing is a Two-Step Process
Step
I – Test for Potential Impairment
- Compares fair value of
reporting unit with its carrying amount (accounting
value).
- If fair value of
reporting unit is greater than its carrying amount
(including recorded goodwill), then no impairment…
no need to perform Step II.
- If the reporting unit
carrying amount (including recorded goodwill) is
greater than its fair value, then must complete Step
II to measure the amount of impairment, if any.
Step
II – Measure the Amount of Impairment Loss
- This step compares the
implied fair value at goodwill of the reporting unit
with the carrying amount of that goodwill.
Note
13 of SFAS 142 states “The fair value of goodwill can
be measured only as a residual and cannot be measured
directly.
Therefore, this Statement includes a methodology
to determine an amount that achieves a reasonable
estimate of the value of goodwill for purposes of
measuring an impairment loss.
That estimate is referred to herein as the implied
value of goodwill”.
- The implied fair
market value of goodwill shall be determined in the
same manner as the amount of goodwill recognized in
a business combination is determined.
- In order to determine
the implied fair value of the goodwill, all assets
must be valued.
- Assets subject to
testing under SFAS 121 must be tested before
goodwill can be tested under SFAS 142.
- If the carrying amount
of a reporting unit goodwill exceed the implied fair
value of that goodwill, then an impairment loss must
be recognized for an amount equal to that excess.
- The impairment loss
cannot exceed the carrying amount of the goodwill.
Only the value of goodwill is adjusted
through this process.
- The adjusted carrying
amount of goodwill will be its new accounting basis.
- Goodwill can not be
increased to its original carrying amount in the
future. Once
written down, it stays down.
See Paragraph(s) 19
- 22 of SFAS 142.
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