Question

Testing goodwill for impairment (include all that apply):

• is done semi-annually
• requires analysis of the financial performance of assets acquired that created the goodwill
• creates a non-cash expense that flows through the income statement if the impairment charge is taken
• creates a rise in the value of the goodwill on the balance sheet if the impairment charge is taken
• all of the above
• none of the above

I am pretty sure that it is the creates a non cash expense option, but the wording of the question does not imply that the impairment has already happened, it says what to do when testing for it, which is making me think that that option mayn't be correct. I also am not sure about the first option I chose.

Answer 1

1. Semi-annually - FALSE

2. Analysis of Financial Performance of assets acquired that created the goodwill - TRUE

3. Non-Cash expense - TRUE

4. Creates a rise in Value of Goodwill - FALSE

Explanation:

1. The goodwill of a reporting unit should be tested for impairment on an annual basis usually, which can be performed at the same time in each succeeding year. It is not necessary to test all reporting units at the same time. The accountant 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.

So Impairment testing for goodwill is usually not done semi-annually

2. In case of business combination, goodwill may be created if Purchase consideration is more than the Fair value of the assets acquired. In such a case, every year all such assets are required to be tested for impairment after allocation of Goodwill to one or more CGUs of acquirer which are expected to benefit from synergies of the business combination.

The impairment test therefore does not test goodwill directly. Any goodwill impairment loss is an allocation of the overall impairment loss of CGU to goodwill rather than a directly measured impairment loss of goodwill.

Therefore, testing of goodwill impairment requires analysis of financial performance of the assets that created it.

3. It is clear that, Goodwill impairment is a non-cash expense. This option is given as a conditional statement. i.e., It is true that IF the test for impairment of goodwill results in impairment of goodwill then a non-cash expense is recorded in Income Statement. Therefore, it is true.

4. Impairment never gives rise the value of Goodwill in any circumstances.

However, for other assets reversal of impairment may be possible but not to Goodwill.

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