Final answer:
Goodwill in a merger is allocated to 'reporting units,' which are parts of an enterprise, such as the divisions or product lines, that can be separately evaluated. The impairment test for goodwill is necessary to determine if its value has been diminished. This is essential for portraying the accurate financial health of a company.
Step-by-step explanation:
Goodwill acquired in a merger must be allocated to business units, commonly known as reporting units, before it can be tested for impairment. These reporting units are defined as components of an enterprise that engage in business activities, have discrete financial information, and can be evaluated separately for performance purposes. Typically, a reporting unit is at a level below the operating segment of a business, such as a division or product line, that has a distinct economic benefit and for which discrete financial information is available. The allocation of goodwill to reporting units is crucial because the value of goodwill is associated with the future economic benefits that are expected from the business combinations. The impairment test is used to determine if the carrying amount of the goodwill exceeds its fair value, indicating that the goodwill is impaired and may need to be written down. This process helps provide a more accurate reflection of a company's financial health and ensures that investors have transparent, accurate information about the value of the company's assets.