Summarize the provisions of SFAS No. 142 related to the definition of goodwill, impairment testing of goodwill, and the proper handling of goodwill in the event of the sale of an acquired subsidiary.

Question

What will be an ideal response?

Answer 1

ANSWER:
The essence of SFAS No. 142 is that goodwill is converted into an intangible asset with an indefinite life but it is subject to write-off as an expense if it becomes “impaired.” Tests of impairment must be made on an annual basis.

Goodwill is numerically defined as the difference between the amount paid for an acquired subsidiary and the fair market value of the individual net assets of the acquired enterprise, and might therefore be defined as the excess earning power of the acquisition.

The basic impairment test after acquisition would compare (1) the fair market value of the acquisition against (2) the historical cost of the net assets plus goodwill at an annual measurement date after acquisition. If (1) is greater than (2), no impairment has occurred. However, if (2) is greater than (1), goodwill is impaired and the impaired amount is written off as a loss appearing above income from continuing operations. The loss cannot exceed the recorded amount of goodwill nor can goodwill, once written off, be restored. If circumstances merit it, tests of impairment should be done more frequently than annually.

In the event of the sale of an acquired subsidiary, any goodwill attributable to the subsidiary must go off of the books.