Since goodwill is no longer amortized, it and other indefinite lived intangible assets (also not subject to amortization) must be tested for possible impairment on an annual, if not more frequent, basis.
Current accounting standards call for a two-step process to determine a) whether or not impairment exists and b) if so, the extent of such impairment:
Step One:
Determine the fair value of a reporting unit for comparison with its carrying (book) value, including goodwill. Should the fair value of the reporting unit exceed the carrying amount, no impairment is indicated. If, however, the carrying amount exceeds the fair value of the reporting unit, then impairment is indicated and step two must be performed to measure the amount of the impairment loss.
Step Two:
Accounting standards indicate that the fair value of goodwill is a residual value and cannot be measured directly. Thus, step two is similar to a purchase price allocation analysis, whereas the fair values of all assets are determined. If the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, then a goodwill impairment loss is recognized for an amount equal to differential.
Valuation Services