What is Goodwill?

Goodwill is the excess amount paid by an acquirer for an acquiree over the fair market value of the identifiable assets and liabilities of the acquiree. This is a fairly common situation, when an acquirer perceives a high degree of value in an acquiree, and so is willing to pay a high price for it. The goodwill asset must be examined at intervals to determine whether its carrying amount is greater than its fair value. If this is the case, then the goodwill is said to be impaired, and must be written down to its fair value.

When to Test for Goodwill Impairment

The goodwill of a reporting unit should be tested for impairment on an annual basis, which can be performed at the same time in each succeeding year. It is not necessary to test all reporting units of a business at the same time. You should also test the goodwill of a reporting unit for impairment between the normal annual tests if there is a change that would more likely than not reduce its fair value below its carrying amount.

Examples of the changes that could reduce the fair value of an asset are noted below:

An adverse action taken by a regulator. For example, a regulator might not allow a utility to raise the prices it charges to customers.
The loss of key personnel. For example, the loss of a key business unit manager might have an adverse impact on the value of the business unit.
A significant adverse change in legal factors. For example, a new law that restricts the sale of a company’s primary product will reduce the company’s fair value.
When a reporting unit is more likely than not to be sold or disposed of. This is a particular concern with the sale price of the reporting unit is likely to be at a fire sale price.
When there was a goodwill impairment loss for a subsidiary of the reporting unit
When there is unanticipated competition. For example, a business in an adjacent industry might suddenly enter your market with competitive products.