Impairment of Goodwill

Brief Definition

Impairment of goodwill occurs when the carrying value of goodwill on a company’s balance sheet exceeds its fair value, indicating that the value of the acquired business has declined.

Further Explanation

Impairment of goodwill occurs when the carrying value of goodwill on a company’s balance sheet exceeds its fair value, indicating that the value of the acquired business has declined. Goodwill is an intangible asset that arises when a company acquires another business for more than the fair value of its identifiable net assets. Regular impairment testing is required to ensure that the goodwill value is still justified.

Example:
A company acquires a subsidiary for $10 million, including $2 million in goodwill. If subsequent analysis shows that the fair value of the subsidiary has dropped and the carrying amount of the reporting unit is now only $8 million, the goodwill is impaired by $2 million. The company records a $2 million impairment loss in its income statement and reduces the goodwill value on its balance sheet accordingly.