The goodwill impairment test
Case Study
Universe Inc. is a US-based company that manufactures sports equipment. Universe Inc. is made up of tree reporting Units, and that is Fitness Equipment, Golf Equipment, and Hockey Equipment. Due to the presence of other companies, Universe Company faces a lot of competition whereby growth and profitability was always tied to the market as well as the consumer demands. The largest reporting unit within the company is the fitness equipment component. Over the years, there have been several acquisitions that have led to recorded goodwill of $200 Million, which was assigned entirely to this unit. The Gold equipment component is the largest manufacturers, which was acquired in 2004. Upon the acquisition of this unit, the company recorded goodwill of $ 130 million that was specifically assigned to this unit. The hockey component is a small manufacturer for hockey equipment that the Universe acquired in 2003 to gain entry into the hockey equipment market that is profitable. Concerning this acquisition, Universe has managed to record $30 million of goodwill assigned to this unit. Universe has selected an annual goodwill impairment testing date on December 31st that will cover all the three reporting units. In December 20X1, Universe management decided to engage the solid rock LLC, which is one of the reputable, external as well as the valuation firm that can be used to perform the three annual ASC 350, Intangibles-Goodwill as well as the other. Since each of the three had significant cushions, it was clear that they would pass the first step of the goodwill impairment test.
Interim Goodwill Impairment Test
The management needs to undertake a goodwill impairment test. The goodwill impairment test will help the management to identify whether the recognized goodwill that is related to the acquisition value is more than the implied fair value.
On the other hand, the management is not required to have performed the goodwill impairment test because it might show that the goodwill which is associated with the acquisition is has gone beyond the implied fair value, and this may impact the financial statements of the company.
Solution
The appropriate solution, in this case, is that the management should have decided to perform the impairment goodwill test because it will help it to understand the value of the acquired asset. Moreover, the goodwill impairment test will help the company to understand whether the value of the acquired asset has surpassed the impaired fair value.
Qualitative Analysis
Apart from conducting the goodwill impairment test, the company may consider carrying out the qualitative impairment assessment. The management must perform the qualitative impairment assessment as it would reduce the cost as well as the complexities related to testing the entities. Also, the use of the qualitative impairment test will help the company to be able to repurpose other valuations that may be critical to the company.
On the other hand, conducting a qualitative impairment assessment is important in the sense that there some uncertainty regarding the outcome. Therefore the company may not be sure of what to expect after performing the assessment. Also, the management should not have conducted a qualitative impairment assessment because it is no simple task. Therefore, this test may affect the company in the sense that a lot of resources and time may be consumed, and the desired outcome may not be achieved.