Next video:
Loading the player...

Goodwill impairment results when the fair market value of a company’s goodwill asset is less than its historical cost (or book value) as listed on the company’s balance sheet.

Generally accepted accounting principles (GAAP) require businesses that have the type of assets that might be impaired to make periodic tests to see if those assets are, in fact, impaired. Goodwill is the most common type of asset that is checked for impairment.

To check for impairment, auditors make a calculation based on the present value of the future cash flows of the asset that caused the goodwill.  Usually goodwill is based on intangibles such as high brand awareness or a large, loyal customer base.

If goodwill is impaired, then it must be written down to its lower fair market value. The difference between the book value and fair market value is recorded as a loss due to goodwill impairment in the company’s income statement.

Conglomo purchased XYZ as a subsidiary and recorded $50 million of goodwill relating to the purchase.  However, due to a drastic decline in market share for XYZ’s products, its discounted cash flow value dropped, resulting in a $45 million reduction in goodwill value. As a result, Conglomo must record a loss due to impairment of assets in the amount of $45 million in its current year income statement.  The goodwill associated with the XYZ purchase will now be listed at $5 million on the Conglomo balance sheet.

Related Articles
  1. Investing

    How Does Goodwill Affect Stock Prices?

    “If a business does well, the stock eventually follows.” - Warren Buffett
  2. Investing

    Can You Count On Goodwill?

    Carefully examine goodwill and its sources before considering the value of your investment.
  3. Investing

    How To Calculate Goodwill

    Despite being intangible, goodwill is quantifiable and an important part of a company’s valuation.
  4. Investing

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  5. Investing

    How To Calculate Goodwill

    Goodwill is an intangible, but it is still possible to effectively calculate or estimate goodwill for a company.
  6. Investing

    Goodwill and Intangible Assets: One And The Same?

    "Goodwill" is a broad category for non-physical assets that are impossible to separate from the business itself, whereas "intangible assets" are individually identifiable and can be sold separately ...
  7. Investing

    Goodwill

    Goodwill is more than just benevolence - it also refers to an accounting term frequently used in M&A. Learn more about it here.
  8. Managing Wealth

    Understanding Impairment

    In finance and accounting, impairment refers to the loss of value of a company’s capital stock.
  9. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  6. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
Trading Center