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How are Goodwill Impairment Losses Accounted?



When circumstances indicate that the goodwill may have become impaired, the remaining goodwill will be estimated. If the resulting estimate is less than the book value of the goodwill, a goodwill impairment loss is recorded. What is Goodwill Impairment Loss? How is Goodwill Impairment Loss Handled? How to calculate Goodwill Impairment Loss? How to record Goodwill Impairment Loss? This post answers the question.

The impairment loss is reported in the consolidated income statement for the period in which it occurs. It is presented on a before-tax basis as part of continuing operations and may appear under the caption “other gains and losses”. The parent company could handle the impairment loss in two ways:


[1]. The parent could record the impairment loss on its books and credit the investment in subsidiary account. This would automatically reduce the excess available for distribution, including the amount available for goodwill. This would mean that the impairment loss would already exist before consolidation procedures start. The loss would automatically be extended to the Consolidated Income column. On the controlling schedule, the loss would appear as a debit in periods subsequent to the impairment, the controlling retained earnings would already have been reduced on the parent’s books, and no adjustment would be needed.

[2]. The impairment loss could be recorded only on the consolidated worksheet. This would adjust consolidated net income and produce a correct balance sheet. The only complication affects consolidated worksheets in periods subsequent to the impairment.

The investment account, resulting goodwill, and the controlling retained earnings would be overstated. Thus, on the worksheet, an adjustment reducing the goodwill account and the controlling retained earnings would be needed.

The procedure used in this post text will be to follow Option 1 and directly adjust the investment account on the parent’s books. This approach would mean the price used in the schedule would be reduced by the amount of the impairment.

The impairment loss is applicable only to the interest owned in the subsidiary. The impairment test must use the sophisticated equity investment balance (simple equity balance less amortizations of excess to date).

Example: Suppose Company P purchased an 80% interest in Company S in 20X7 and the price resulted in goodwill of $165,000. On a future balance sheet date, say December 31, 20X9, the following information would apply to Company S:

Sophisticated equity method investment balance on December 31, 20X9 = $800,000
Estimated fair value of Company S                                                            = $900,000
Estimated fair value of net identifiable assets                                           = $850,000


Determining if goodwill has been impaired would be calculated as shown here:

Goodwill Impairment Loss


Sophisticated equity method investment balance on December 31, 20X9 = $800,000
Estimated fair value of investment, 80% x $900,000                                 = $720,000

Because the investment amount exceeds the fair value, goodwill is impaired, and a loss must be calculated.

The impairment entry on Company P’s books would be as follows:

[Debit]. Goodwill Impairment Loss = $125,000
[Credit]. Investment in Company S = $125,000


You are invited to comments: If you have any comments [or concern] about Goodwill Impairment Loss, do spot and share it here.

1 Comment

1 Comment

  1. arshad

    Feb 19, 2010 at 5:12 am

    I have query regarding revised IFRS-3 that if we are using full goodwill method and while calculating good will we found following cases:
    1- Negative Parent goodwill and negative NCI part of goodwill.
    2- Negative Parent goodwill and Positive NCI part of goodwill.
    3- Positive Parent goodwill and negative NCI part of goodwill.

    Now in above cases I am facing the following issues:

    1- Negative goodwill of parent will add in consolidated reserves as we did as per previous version of IFRS-3 and after that the SOFP will tie now what we will do with NCI negative goodwill part.

    2- In this situation the parent’s Negative goodwill will add in group reserves and the goodwill of NCI will appear at face of SOFP on assets side and the same amount will add in NCI, and so the SOFP will tie. Am I correct here?

    3- In this situation the Parent Positive goodwill will apprear at SOFP but here I am facing the same problem as in Case 1 that where we take the negative goodwill of NCI.

    Conclusively you can say I am facing problem in the treatment of negative goodwill of NCI. Kindly also tell me whether netting off of parent’s and NCI goodwill is allowed or not.

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