Impairment & Company Case Study

The goodwill impairment can be identified if the recoverable amount of the goodwill is greater than the carrying value of the goodwill then there is no any impairment in the goodwill so there is no requirement for the test of the impairment.

In this question, we have to make a comparison of the carrying value of the goodwill and the recoverable amount. Recoverable amount is greater than the fair value less cost to sell or value in use.

Carrying Value of the Goodwill = $250,000

The value in Use can be calculated as follows. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ $ $ $

Cash flows 50,000 50,000 40,000 30,000 20,000

If we use the Current company discount rate then we can get the following answer

Discount rate@8% 0.926 0.857 0.794 0.735 0.681

Net Cash flow 46,300 42,850 31,760 22,050 13,620

Total Net Cash flow = $156,580

If we use the weighted average cost of

Impairment if Cash flow@ 8% = $250,000 - $156,580 = $93,420

Impairment if Cash flow@ 11% = $250,000 - $146,463 = $103,537

In the asset impairment review process following steps are need to be followed.

Some non-financial measures like brands and customers loyalty or in some cases goodwill do not appear to be the suitable measure while on the other hand; the large number of financial and non-financial information is relevant in this regard. Categorical judgment is difficult due to the differences in value relevance or reliability or both (Wyatt, A 2008)

Access Qualitative Factors:

Situations need to be reviewed whether it need to be tested for the impairment or not. Like if the asset is impaired more than 50% according to the market situation then the impairment test needs to be performed that is based on the relevant event and the circumstances as increase cost, deterioration of the macroeconomic conditions; decline cash flows are those factors that indicate that impairment may be present.

Identification of potential