According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:
NOT Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure.
The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) provides guidelines for conducting the testing procedures for Goodwill Impairment. The proper procedure for conducting impairment testing as per the FASB ASC is as follows:
1. Identify the reporting unit: The first step in the impairment testing process is to identify the reporting unit. The reporting unit is the lowest level at which goodwill is monitored and reported internally to the company’s management.
2. Determine the fair value of the reporting unit: After identifying the reporting unit, you need to determine the fair value of that unit. It can be determined in several ways, such as by estimating expected future cash flows or by using a market-based approach.
3. Compare the fair value of the reporting unit to its carrying value: Once the fair value of the reporting unit is determined, the next step is to compare it to the carrying amount. If the fair value is greater than the carrying value, then no impairment is required. However, if the carrying amount is greater than the fair value, then there is an indication of impairment, and you need to proceed with the next step.
4. Calculate the implied fair value of goodwill: If there is an indication of impairment, then a goodwill impairment test is needed. In this step, you need to calculate the implied fair value of goodwill by subtracting the fair value of assets and liabilities from the fair value of the reporting unit.
5. Compare the implied fair value of goodwill to its carrying value: The final step involves comparing the implied fair value of goodwill to its carrying value. If the carrying value of goodwill exceeds the implied fair value of goodwill, then there is impairment, and the goodwill needs to be written down accordingly.
It is important to note that goodwill impairment testing needs to be performed at least once per year, or more frequently if there is an indication of impairment. Also, the testing procedure needs to be documented carefully, and the results should be disclosed in the financial statements.
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