Goodwill in a bad economy
Many companies and nonprofit organizations have been forced to reduce the value of acquired goodwill on their balance sheets due to today’s unstable economy. In 2022, the anticipation is that more companies will record write-offs or follow suit. If goodwill is written off, even if the company recovers, it cannot be restored in the future. Impairment testing is a severe endeavor that typically calls for input from your CPA to assure accuracy, openness, and timeliness.
According to U.S. Generally Accepted Accounting Principles (GAAP), the acquirer must divide the acquisition price among the assets acquired and liabilities assumed based on their fair valuations when one company merges with or acquires another. The surplus value can be goodwill if the acquisition price is greater than the sum of the identifiable net assets of the purchased firm.
Acquirers must recognize and evaluate other distinguishable intangible assets, such as trademarks, customer lists, copyrights, leases, patents, or franchise agreements, before including the excess value in goodwill. For example, suppose an intangible asset derives from contractual or legal rights or can be sold, transferred, licensed, rented, or exchanged. In that case, it is separate from goodwill.
The reporting units (or operating segments) that profit from goodwill are distributed among them. A single reporting unit makes up a large number of small private organizations. Large corporations, however, could include many reporting units.
Testing for impairment
Goodwill and other intangibles with indefinite lives must often undergo an annual impairment test by organizations. More frequent impairment assessments may be a requirement if other triggering events occur throughout the year. That includes losing a key employee, unexpected competition, reorganization, or unfavorable regulatory measures.
Private firms may choose to amortize acquired goodwill over a useful life of up to ten years. Alternatively, they would have to conduct annual impairment tests. Additionally, new guidance from the Financial Accounting Standards Board (FASB) permits for-profit businesses and private firms to postpone determining the goodwill impairment triggering event until the first reporting date following that triggering event. The modification intends to lower expenses and simplify impairment assessment for triggering events.
Writing down goodwill in a bad economy
When impairment happens, the company must lower the goodwill’s carrying value on the balance sheet and cut earnings by the same amount. On the income statement, impairment charges are a specific line item that could have repercussions in the real world.
For instance, certain companies that report impairment losses may technically be in default on their loan obligations. Management may need to find a new lender or renegotiate loan terms in light of this circumstance. Impairment charges also raise a red flag to investors and other stakeholders.
Few businesses have internal accounting personnel with the necessary training to measure impairment. Contact our RRBB accountants and advisors to learn more about this problem and how it affects your financial accounts.
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