ASC 350 Intangibles - Goodwill and Other: Impairment Testing Transaction Explained with Journal Entries
Posted In | ASC Education | Gridlex AcademyThe ASC 350 accounting standard, established by the Financial Accounting Standards Board (FASB), governs the accounting for intangible assets, such as goodwill and other intangible assets. One critical aspect of ASC 350 is the requirement for businesses to perform impairment testing on these assets periodically. In this article, we will provide an overview of impairment testing transactions under ASC 350 and illustrate how journal entries can be used to account for them.
Impairment Testing under ASC 350
ASC 350 requires businesses to test goodwill and other intangible assets for impairment annually, or more frequently if there is an indication that the asset may be impaired. Impairment testing involves comparing the carrying value of the asset to its fair value. If the carrying value exceeds the fair value, an impairment loss must be recognized.
For goodwill, impairment testing is performed at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. The testing is conducted in a two-step process: Step 1 involves comparing the fair value of the reporting unit to its carrying value, including goodwill. If the fair value exceeds the carrying value, no further testing is required. If the carrying value exceeds the fair value, Step 2 requires a comparison of the implied fair value of goodwill to its carrying value. Any excess of the carrying value over the implied fair value is recognized as an impairment loss.
Journal Entries for Impairment Testing Transactions
To illustrate the concept of impairment testing and the accounting treatment under ASC 350, let's consider a simplified example involving a company that has $100,000 of goodwill on its balance sheet. The fair value of the reporting unit, including goodwill, is determined to be $900,000, while the carrying value of the reporting unit is $950,000.
1. Perform Step 1 of the goodwill impairment test
Since the carrying value of the reporting unit ($950,000) exceeds its fair value ($900,000), the company must proceed to Step 2.
2. Perform Step 2 of the goodwill impairment test
The implied fair value of goodwill is calculated as the fair value of the reporting unit, less the fair value of its net assets, excluding goodwill. In this example, let's assume that the fair value of the reporting unit's net assets, excluding goodwill, is $820,000. The implied fair value of goodwill is:
Implied Fair Value of Goodwill: $900,000 - $820,000 = $80,000
Since the carrying value of goodwill ($100,000) exceeds its implied fair value ($80,000), an impairment loss must be recognized.
3. Journal entries for goodwill impairment
Now, let's create a journal entry to account for the goodwill impairment loss:
Debit: Impairment Loss - $20,000
Credit: Goodwill - $20,000
The ASC 350 standard requires businesses to test goodwill and other intangible assets for impairment periodically, ensuring that the carrying value of these assets does not exceed their fair value. By understanding the concept of impairment testing and properly accounting for impairment losses through journal entries, organizations can maintain accurate financial reporting and compliance with ASC 350. As businesses continue to manage the complexities of intangible assets accounting, it is essential to invest in the right tools and resources, such as advanced accounting software, to streamline the process and ensure ongoing compliance.