Goodwill

Tax Accounting Services

Goodwill impairment testing: Tax considerations

In financial accounting, goodwill is an asset representing the future economic benefits arising from other assets acquired in a business acquisition that are not separately recognized. The measurement of goodwill can be generally described as having mixed attributes: It is a residually calculated amount derived both from assets and liabilities which are measured at fair value and others (including income taxes) which are not measured at fair value. Subsequent to a business acquisition in which goodwill was recorded as an asset, post-acquisition accounting (ASC 350, Intangibles—Goodwill and Other) requires that goodwill be tested to determine whether there has been an impairment loss. Goodwill impairment testing is a two-step process, performed at least annually, on a “reporting unit” basis. In step 1 of the testing process, the fair value of the reporting unit (“RU”) is determined and compared to its book value, including goodwill. If the fair value of the RU exceeds its book value, goodwill of the RU is not impaired; if the book value of the RU exceeds its fair value, the testing proceeds to step 2. In step 2, the RU’s fair value is allocated to its assets and liabilities following acquisition accounting procedures to determine the implied fair value of goodwill. This hypothetical acquisition accounting process is applied only for the purpose of determining whether goodwill must be reduced; it is not used to adjust the book values of other assets or liabilities. There is an impairment if (and to the extent) the carrying value of goodwill exceeds its implied fair value. An impairment loss reduces the recorded goodwill and cannot subsequently be reversed. Numerous tax law and tax accounting considerations can impact whether there is an impairment of goodwill as well as the amount of impairment. This paper discusses five primary tax focal points, beginning at the outset of step 1 with the...