Goodwill Is An Intangible Asset

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Goodwill is an intangible asset recorded on the balance sheet when one business acquires another business and when the purchase price, or carrying value, is greater than the fair market value. It includes the reputation, brand, geographic location, patents, employee commitments, and etc of the acquired company. Goodwill is calculated by deducting the carrying value from the fair market value of identifiable assets and liabilities. According to the FASB Accounting Standards Codification (ASB), which is the authoritative source for GAAP, if fair value is less than the carrying value, net identifiable assets, then there may be a potential impairment loss. (FASB ASC 350, 2013). Net identifiable assets typically include a summation of…show more content…
Finally, the standard also indicates that the component should be combined and treated as a single reporting unit in limited circumstances.
It is crucial to ensure that the reporting units are identified properly because testing impairment at the reporting unit level, versus testing another level, could result in dramatically different conclusions. For example, goodwill that does not appear to be impaired at the consolidated level, perhaps due to the strong performance of some segments, may offset the deteriorating performance of others. However, goodwill rose from the acquisition upon the poor performing segments, so testing that goodwill for impairment at the segment level might result in an entirely different conclusion.
ASC 350-20 specifically indicates that the impairment test should be performed on an annual basis. Importantly, the entity has the option of selecting the date in which they want to perform the test, which doesn’t have to be in its fiscal year end. But once the date is selected, the test should be performed at the same day in subsequent periods to avoid bottlenecks. In addition to performing the test on an annual basis, the test should be performed when every balanced circumstance indicates that the fair value of goodwill is less than its carrying value (FASB ASC 350, 2013). Finally, entities often perform impairment tests and have different assets with the same
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