How Do You Account for Goodwill Impairment?


Quick Answer

A company accounts for goodwill impairment by testing the current value of its goodwill assets against its recorded value on an annual basis. If the value of the company's goodwill has fallen during the previous year, the company is considered to have a goodwill impairment. To account for this, the company must record the current, lower value of its goodwill on its balance sheet.

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Full Answer

Goodwill impairment became a public issue during the early 2000s due to many accounting scandals that occurred during that time period. Some publicly traded firms artificially inflated the value of their goodwill on their balance sheets. This resulted in the share prices of their stocks becoming overvalued, leading to an eventual collapse in share prices that hurt many investors. Because of these scandals, legislation was enacted that required publicly traded companies to perform annual goodwill impairment tests based on methodologies specified by accounting practices.

Goodwill assets are intangible assets that are acquired by one company through the purchase of another company. Goodwill is represented by the amount over book value paid for the acquisition. If a purchasing company pays less than book value, the acquisition is considered to have negative goodwill. Goodwill assets are valuable intangibles such as brand name recognition, good pubic relations and a reputation for excellent customer service.

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