What is Goodwill Impairment?
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Goodwill impairment is an accounting charge that companies record when goodwill's carrying value on financial statements exceeds its fair value. In accounting, goodwill is recorded after a company acquires assets and liabilities, and pays a price in excess of their identifiable net value.Goodwill impairment arises when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value. Perhaps the most famous goodwill impairment charge was the $54.2 billion reported in 2002 for the AOL Time Warner, Inc. merger.
Definition
Goodwill impairment occurs when the carrying value of goodwill on a company's financial statements exceeds its fair value, necessitating an accounting write-down. Goodwill is an intangible asset recorded when a company acquires assets and liabilities and pays more than their identifiable net value.
Origin
The concept of goodwill impairment developed with the increase in corporate mergers and acquisitions. Particularly in the late 20th and early 21st centuries, as large corporate mergers became frequent, goodwill impairment became a significant issue in financial reporting. The $54.2 billion impairment loss disclosed by AOL Time Warner in 2002 is one of the most famous cases in the history of goodwill impairment.
Categories and Features
Goodwill impairment is primarily categorized into annual impairment tests and trigger event impairment tests. The annual impairment test is a mandatory evaluation conducted by companies each year to determine if the fair value of goodwill is less than its carrying value. Trigger event impairment tests are conducted when events occur that may affect the value of goodwill. A key feature of goodwill impairment is its irreversibility; once an impairment is recognized, it cannot be reversed in the future.
Case Studies
A typical case is the 2002 merger of AOL and Time Warner. Following the merger, due to the bursting of the internet bubble and poor company performance, AOL Time Warner announced a $54.2 billion goodwill impairment loss, the largest at the time. Another case is General Electric's (GE) announcement of a $23 billion goodwill impairment in 2018, primarily due to poor performance in its power business.
Common Issues
Common issues investors face with goodwill impairment include: How to determine the necessity of goodwill impairment? What is the impact of goodwill impairment on a company's financial condition? Typically, goodwill impairment results in reduced assets and lower profits for the company but does not affect cash flow.
