Analysis Of Goodwill Impairments And Their Effects On Financial Statements

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Analysis of Goodwill Impairments and
Their Effects on Financial Statements
The impairment-only accounting model for goodwill was initially brought to the table in 2004, to replace the previous amortization-based model. Over the years, research supported the idea that impairment charges improved the fundamental economic attributes of goodwill than systematic amortization charges. Research also revealed that such annual changes had minor information value to users. According to KPMG (2014), this was the key reason why the US Financial Accounting Standards Board (FASB) “replaced straight-line amortization of goodwill with this model that was based exclusively on impairment testing” (p. 4). The FASB argued that this approach provides
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After the value is determined, if the goodwill’s fair value is less than the carrying value, the goodwill is considered “impaired” and must be charged off. Essentially, the charge off reduces the value of goodwill to market value, reflecting a “mark-to-market” charge.
Essentially, goodwill is the “value of an asset that is considered intangible but has a quantifiable prudent value in a business (Boundless, 2014).” An example of goodwill could be the reputation a firm has with its client. It is important to remember that although goodwill is technically an intangible asset, it typically is listed separately on a business balance sheet.
Goodwill impairments under SFAS 142, has been the subject of many controversies. Opponents worry that specific aspects of the standard “are complicated and require judgment (Boundless, 2014). ” Therefore, a goodwill impairment charge has the ability to increase the uncertainty of the analysts forecasting. Goodwill is recorded at the “time of a business combination by an acquiring entity, and is defined as the excess of the consideration transferred plus te fair value of any non-controlling interest in the acquire at the acquisition date over the fair values of the identifiable net assets acquired” (FASB, 2007). Prior to the SFAS 141 and SFAS 142, APB Opinion No.17 regulated accounting for goodwill (Chen, Krishnan,
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