ASC 350-20: Goodwill Impairment Loss Journal Entries for Intangibles

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) 350-20, Intangibles - Goodwill and Other - Goodwill, provides guidance on the accounting treatment of goodwill and its impairment. This standard is essential for entities with goodwill on their balance sheets, as it ensures consistent accounting treatment for the valuation and potential impairment of goodwill. In this article, we will discuss the key aspects of ASC 350-20 and provide examples of journal entries to illustrate the accounting treatment of goodwill impairment loss transactions.
 

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ASC 350-20 Overview

ASC 350-20 applies to entities that have goodwill on their balance sheets resulting from business combinations. The guidance addresses various aspects of accounting for goodwill, including:
 

1. Recognition and initial measurement of goodwill
 

2. Subsequent measurement and impairment testing
 

3. Recognition and measurement of goodwill impairment loss
 

Goodwill Impairment Testing

Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. Goodwill impairment testing is performed at the reporting unit level and involves two steps:
 

1. Identifying potential goodwill impairment by comparing the fair value of the reporting unit to its carrying amount
 

2. Measuring the goodwill impairment loss, if any, by comparing the implied fair value of goodwill with its carrying amount
 

Journal Entries

To illustrate the accounting treatment under ASC 350-20 for goodwill impairment loss, let's consider a simplified example. A company has a reporting unit with a carrying amount of $5 million, including goodwill of $1 million. The fair value of the reporting unit is determined to be $4.5 million.
 

1. Identifying potential goodwill impairment:

Since the fair value of the reporting unit ($4.5 million) is less than its carrying amount ($5 million), the first step of the impairment test indicates that goodwill may be impaired.
 

2. Measuring goodwill impairment loss:

To measure the goodwill impairment loss, the company must first allocate the fair value of the reporting unit to its assets and liabilities, excluding goodwill. Assume that the implied fair value of goodwill, based on the allocation, is $600,000. The goodwill impairment loss would be the excess of the carrying amount of goodwill over its implied fair value:
 

Goodwill Impairment Loss = Carrying Amount of Goodwill - Implied Fair Value of Goodwill

Goodwill Impairment Loss = $1,000,000 - $600,000

Goodwill Impairment Loss = $400,000
 

The journal entry to record the goodwill impairment loss would be:

Goodwill Impairment Loss $400,000

Goodwill $400,000

 

ASC 350-20 provides a comprehensive framework for accounting for goodwill and its impairment. By testing goodwill for impairment and recognizing impairment losses when necessary, entities can ensure accurate financial reporting and maintain compliance with accounting standards. The journal entries provided in this article offer a clear understanding of the application of ASC 350-20, enabling stakeholders to better comprehend the intricacies of goodwill impairment loss transactions.