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Evaluate impairment loss for Goodwill and other indefinite-lived intangible assets.
Step 1: Identify Potential Impairment
Compare the Fair Value (FV) and Book Value (BV) of the reporting unit to assess potential impairment (Quantitative Test).
FV vs. BV Comparison
-$20,000
Potential Impairment Exists (FV < BV)
Step 2: Measure Impairment Loss
If potential impairment is identified in Step 1, measure the amount of the impairment loss.
Impairment Loss to Recognize
$20,000
Impairment loss is the lesser of (BV - FV) and the book value of goodwill.
Journal Entry
(Dr) Impairment Loss 20,000 / (Cr) Goodwill 20,000
Impairment Test
Directly measure the impairment loss by comparing the fair value and book value of other indefinite-lived intangible assets (e.g., trademarks).
Impairment Loss Measurement
Impairment Loss to Recognize
$15,000
Impairment Loss = Book Value - Fair Value
Journal Entry
(Dr) Impairment Loss 15,000 / (Cr) Intangible Asset 15,000
Core Concepts Summary
Indefinite-Lived Intangible Assets
Assets that lack physical substance and have no foreseeable limit to the period over which they are expected to generate cash flows. Goodwill is a primary example, along with certain trademarks.
- Accounting Treatment: Not amortized, but tested for impairment annually (or more frequently if indicators exist).
- Carrying Amount: Acquisition Cost - Accumulated Impairment Losses.
Goodwill
The excess of the purchase price over the fair value of the net assets acquired in a business combination. It represents intangible resources like brand reputation, customer loyalty, etc.
Impairment Test
A process to determine if an asset's recoverable amount (fair value) is less than its carrying amount.
- Qualitative Assessment: An optional first step to determine if it is "more likely than not" that an asset is impaired. If not, the quantitative test can be skipped.
- Quantitative Test: A direct comparison of the asset's fair value and its book value.
- Reversal of Impairment Loss: Once recognized, an impairment loss cannot be reversed in future periods, even if the fair value recovers (unless the asset is held for sale).