Answer:
Please refer the detail answer in the memo below
Explanation:
Date: 24 January 20XX
Subject: Review of Impairment of Goodwill
From: External Auditors
To: Chief Accountant, Plush Corporation
Upon review of the investment made by your company in Common Corporation, we believe that there are possible indications of the impairment of the goodwill initially recognized in the books upon acquisition.
At the time of Acquisition:
Consideration = $450,000
Fair Value of Net Assets = $430,000
Goodwill = $450,000 - $430,000 = $20,000
The new guidance issued by FASB, requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value.
However, if we follow the previous guidance of FASB, we have to test the impairment with the following three steps:
Step 1: We will compare the carrying amount of the net assets with the Fair value of Reporting Unit, and if the carrying amount exceeds the fair value, we will record the impairment.
Step 1: We will compute, implied value of goodwill by comparing the fair value of the reporting unit with the fair value of the identifiable net assets, if FV of net assets are higher, then there is no impairment, otherwise we will jump to Step 3.
Step 3: If the calculated implied value of the goodwill is lower than the actual goodwill at acquisition, than the difference is the impairment loss, however in case the implied value of the goodwill is higher than the actual goodwill at acquisition, no impairment shall be recorded.
Apparently, since the fair value of Common had increased to $485,000, there is no need to recognize the impairment loss on goodwill; however we believe that the estimated fair value of Common is less than the $430,000 and therefore impairment should be recorded.
