Learn On Your Own Accounting Entries For Goodwill Impairment:

Goodwill is an intangible asset. It is that extra value which is paid to the selling company at the time of acquisition of company.

At the time of acquisition, when the purchasing company pays to the selling company more than the fair value of net identifiable assets, the excess of price which is paid over the fair value of net identifiable assets (assets minus liabilities) is recorded as a separate asset called goodwill.

Goodwill Impairment:

Post acquisition of a company, when the buying company pays more than the value of assets, the differential amount is the value of goodwill. Now this value of goodwill needs to be tested every year mandatorily according to GAAP.

When Company "A" acquires Company "B" and pays Company "B" 1 Crore which is 20 Lakhs above the fair value of net identifiable assets of Company "B". The difference of 20 Lakhs is the value of goodwill that is to be shown in the balance sheet of the purchasing company (Company "A") because it is the acquired price.

Now, post acquisition, when the sales value of Company "A" falls due to many reasons, the market value of Company "B" also falls from 80 Laks to 75 Lakhs.

One year post acquisition, it reveals that the fair value of Company "B" has fallen it wouldn't get a book value price or higher than its book value. Company "A" must now make goodwill impairment.

In the above example it is found that the fair value of Company "B" has fallen from 1 Crore (Net Assets 80 Lakhs + Goodwill 20 Lakhs) to 95 Lakhs (Net Assets 75 Lakhs + Goodwill 20 Lakhs). The difference between the two is 5 Lakhs, and Company "A" must therefore reduce the goodwill on its books by that amount. The goodwill entry on its balance sheet goes from 20 Lakhs to 15 Lakhs, and its total assets fall correspondingly.

Goodwill impairment is the differential amount (excess amount) than its fair value that needs to be recorded in the financial statement of the company.

Goodwill impairment arises when the capability of purchased assets to generate cash inflows deteriorates, and the fair value of the goodwill falls below its book value.