Question

Calculation of and journal entries for impairment of goodwill

Gandaph Corporation purchased a division five years ago for $ 3 million. The division has been identified as a reporting unit that is cash-generating under IFRS. Management is reviewing the division for impairment of goodwill and has estimated the fair value of the reporting unit to be $ 3.2 million and the unit’s value in use to be $ 3.3 million. In addition, there would be $ 75,000 in direct costs should the company decide to sell. The carrying amounts of the division’s net assets, including the associated goodwill of $ 1,350,000, are listed below.

Carrying Amount of Net Assets Including Goodwill

Cash $ 300,000

Receivables 450,000

Inventory 1,050,000

Property, plant, and equipment (net) 1,200,000

Goodwill 1,350,000

Less: Accounts and notes payable   (750,000)

Net assets, at carrying amounts $ 3,600,000

Instructions

Determine if goodwill is impaired and provide the related journal entries, if any, under both ASPE and IFRS.

Answer 1

ASPE,

ASPE requires that goodwill to be impaired if carrying value (including goodwill) exceeds its fair value of reporting unit.

Carrying value of reporting unit = $3,600,000

Fair value of reporting unit = $3,200,000

Impairement of goodwill = $400,000

Account title	Debit $	Credit $
Impairement loss	$400,000
Goodwill		$400,000

IFRS,

As per IFRS compare the Recoverable amount of cash generating unit to the carrying value .

Recoverable amount is higher of Value in use or (Fair value less cost to sell)

Value in use = $3,300,000

Fair value less cost to sell = $3,200,000 - $75,000 = $3,125,000

Hence Recoverable amount = $3,300,000

Carrying amount = $3,600,000

Impairement of goodwill = Carrying value less Recoverable amount

= $3,600,000 - $3,300,000

= $300,000

Account title	Debit $	Credit $
Impairement loss	$300,000
Goodwill		$300,000

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