Goodwill Goodwill is an intangible asset and is the difference between a company’s total value and current market value of their tangible assets (Buying a Business). For example, a company purchases another firm for ten million and the tangible assets of that firm are worth one million; nine million would be the company’s goodwill. There are many things that make up the value of a company’s goodwill; such as customer loyalty, reputation, copyrights, patents etc. Most of the value of a company does not come from the hard assets, but in the intangible asset. Because reputation has an affect on a company’s goodwill, a publicly traded company’s goodwill can be affected more than a private company’s; therefore publicly traded companies have to be more careful about their decisions and ethics.
One way goodwill could go down is if a company’s reputation were to be damaged. When a company’s reputation goes down it can cause their stock prices to go down; therefore, reducing their market value. When the market value of a company goes down, their goodwill goes down as well, and this is called impairment. Impairment is when the carrying amount of goodwill is greater than its implied fair value (ASC 350-20-35-2). According to the Financial Accounting Standards Board (FASB), Impairment must be tested annually anytime during the fiscal year as long as it is done the same time every year by using the two-step process and if impairment exists, the impairment losses are put in the income statement (ASC 350-20-35-28)(ASC 350-30-45-2).
Before taking the two-step impairment test, you must first conduct a Qualitative Assessment; which is used “to determine whether or not it is more likely than not that the fair value of the reporting unit is less than its carrying amount” (ASC 350-20-55-25). If the result of the Qualitative Assessment is “it is more likely than not”, you would