Question

A multinational co. based in China expanded its manufacturing business in the U.S. and purchased 2 companies. Because of these acquisitions, the company assumed debt of $2.2B & allocated $4.8B. They reported 2 industry segments to the SEC: distribution & supply. The distribution segment was profitable, but the supply segment produced a $2B loss in total. ($450M in current year) This year, the company declared a $3.7B write down in goodwill associated with the acquisition. The results of the 2 segments were combined and reported as manufacturing. Little profit was shown. The consolidated financial statements did not disclose the losses for the supply company.

How should the write down of goodwill be reported?

Answer 1

Goodwill is the difference between the aggregate of the acquisition-date fair value of the consideration transferred and the acquirer's share of the company's net identifiable assets and liabilities measured at fair value on the acquisition date. The consideration transferred is measured at fair value, including also the acquirer's previously held equity interest.

Good­will can be re­cog­ni­zed as an in­tan­gib­le as­set only if it is ac­qui­red in a bu­si­ness com­bi­na­tion. In­ter­nally ge­ne­ra­ted good­will can not be ca­pi­ta­li­zed in the ba­lan­ce sheet.

As per GAAP, public companies must run annual impairment tests to determine whether the carrying value of goodwill exceeds its current “fair value.” If so, the company must reduce the carrying value of goodwill on the balance sheet and report an impairment loss on the income statement.