HP's Acquisition of Autonomy

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Goodwill Impairment and Fair Value Measurement: Hewlett-Packard’s Acquisition of Autonomy

In today’s business environment, mergers and acquisitions are becoming increasingly common. Mergers and acquisitions create many accounting challenges including issues of fair value measurement and the associated topic of goodwill impairment. The fair value measurement of an acquired company usually entails using a Level 2 fair value estimate, or using a market or income approach, both level three fair value estimates. Valuing an entity using the income approach can be a very challenging due to the significant unobservable inputs that must be used to arrive at fair value. Such unobservable inputs include items such as growth rates and
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(Add sentence about attributing a monetary value to goodwill.) In subsequent years, any amount of goodwill determined from this fair value calculation needs to be tested for impairment.
In order to determine if goodwill impairment is required the Accounting Standards Codification (ASC) describes a two-step test for impairment (ASC 350-20-35). The first step is to compare the carrying value of the entity (Autonomy) and compare it to its calculated fair value. If the fair value is less than the carrying value (including goodwill) then it is necessary to move onto step two. Step two states that if the implied fair value of goodwill is greater than the carrying value of goodwill, then there must be a subsequent impairment to make up the difference. That means that if the reporting entity qualifies after both tests, there must be a goodwill impairment loss to set the carrying value equal to the implied fair value. HP describes how they test for goodwill impairment in their 2012 10-K,
For goodwill, HP performs a two-step impairment test. In the first step, HP compares the fair value of each reporting unit to its carrying value…If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed…If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then HP

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