Journal Entry for Goodwill Impairment
Goodwill impairment happens when the fair value of the business is less than its book value. In this case, the company needs to make the journal entry for goodwill impairment by recognizing and recording the impaired amount in the period that it occurs.
In accounting, goodwill is defined as an excess amount that the company pays for purchasing another company. It is recorded on the balance sheet as an intangible asset; however, it is not be amortized like other intangible assets with finite useful life. In this case, the company needs to periodically review the goodwill for the impairment (e.g. at least once a year).
Once the company finds that there is an impairment on goodwill, it needs to recognize and record it as a loss on the income statement as well as reduce the balance of the goodwill on the balance sheet accordingly. As a result, the journal entry for goodwill impairment will reduce the total assets on the balance sheet and at the same time, it will increase the total expenses on the income statement.
Journal entry for goodwill impairment
The company can make the journal entry for goodwill impairment by debiting the goodwill impairment account and crediting the goodwill account when it finds out that there is an impairment of goodwill as a result of periodic review.
Goodwill impairment is an expense item on the income statement in which its normal balance is on the debit side. In this case, the goodwill impairment is similar to the impairment of other types of assets as it represents a loss due to the impairment of an intangible asset; though in this case is a loss due to the impairment of goodwill.
On the other hand, the credit of goodwill account in this journal entry represents the reduction of the balance of the goodwill on the balance sheet of the company as a result of impairment. Additionally, this reduction will not be reversed back at the subsequent period even when the business has recovered.
Goodwill impairment example
For example, on December 31, after using the discounted cash flow analysis, the company ABC finds out that the goodwill that comes from the previous purchase of one of its subsidiaries has been impaired by $1,000,000. This discounted cash flow analysis is performed by using the comparable company analysis and valuation multiplies in order to determine the fair value of its business. As a result, it is deemed reasonably accurate that the goodwill on the balance sheet of the company ABC as a group is impaired by $1,000,000 as of the reporting date which is December 31.
In this case, the company ABC as a group can make the journal entry for goodwill impairment on December 31 by debiting the $1,000,000 into the goodwill impairment account and crediting the same amount into the goodwill account.
In this journal entry, the goodwill which is an intangible asset on the balance sheet of the company ABC will be reduced by $1,000,000 as a result of the impairment. Likewise, the total assets on the balance sheet of the company ABC will decrease by $1,000,000 while the total expenses on the income statement will increase by the same amount as of December 31.
It may be useful to note that, once the goodwill is impaired, its balance will stay in a certain amount after impairment or reduce further due to more impairment until it reaches zero. However, the goodwill impairment should never reduce the balance of goodwill to below zero. Additionally, the goodwill impairment is not allowed to be reversed back in the subsequent period, even when the fair value of the business (i.e. the reporting unit or the CGU) has increased. These are applied the same in the accounting rule whether it is under the U.S. GAAP or the IFRS.