Final answer:
To calculate goodwill impairment, compare the reporting unit's carrying amount including goodwill to its recoverable amount. If the carrying amount exceeds the recoverable amount, recognize an impairment loss for the difference. The impairment loss is then reflected in the financial statements.
Step-by-step explanation:
To calculate the impairment of goodwill, you must follow the guidelines outlined in the accounting standards such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) depending on the regulatory environment. The process typically involves comparing the carrying amount of a reporting unit including goodwill to its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized for the amount by which the carrying amount exceeds the recoverable amount.
The steps to calculate the impairment of goodwill are generally as follows:
- Determine the carrying amount of the reporting unit, including goodwill.
- Estimate the recoverable amount of the reporting unit, which is the higher of the fair value less costs to sell, and the value in use.
- If the carrying amount is greater than the recoverable amount, calculate the impairment loss as the difference between the two.
- Recognize the impairment loss in the financial statements, reducing the carrying amount of goodwill accordingly.
An example would be if a reporting unit has a carrying amount of $100,000 including goodwill, and the recoverable amount is estimated at $85,000, the impairment loss would be $15,000 ($100,000 - $85,000).