ACCT 525 Week 3 Homework Assignment; FASB Codification Standards

2. Goodwill Impairment Testing ASC 350 → 20 → 35 (Subsequent Measurement) Goodwill arises when a company acquires another business for more than the fair value of its identifiable net assets. For example, if a tire manufacturer acquires a smaller rubber parts supplier to expand production capacity, any excess purchase price is recorded as goodwill. Unlike tangible assets, goodwill is not amortized but must be tested for impairment at least once per year and whenever a triggering event occurs, which might cause its value to have declined (FASB, 2023b). Triggering events might be lower-than-expected revenue shifts in the industry that may cause the company to underperform. Under ASC 350-20-35, the company compares the fair value of the reporting unit, (that part of the business that includes the acquired business) with its carrying amount on the books. If the carrying amount ends up being higher than the fair value, the company has to recognize an impairment loss. This loss is limited to the amount of recorded goodwill and is reported in operating income. Importantly, once goodwill is written down, it can’t be written back up in future periods even if business conditions improve. Companies may also perform a qualitative assessment, often called “Step 0”, to determine whether it is more likely than not that goodwill is impaired. If qualitative factors (such as declining cash flows or a significant drop in market share) indicate possible impairment, the entity proceeds with the quantitative test. If the qualitative review doesn’t raise red flags, the company can skip the full quantitative test for that year. For a mid-sized tire manufacturer, this impairment model helps ensure goodwill 3. Held-to-Maturity Securities are investments that a company intent and have the ability to hold to maturity. They should be measured subsequently at amortized cost in the statement of financial position.