Final answer:
Goodwill is an intangible asset related to the acquisition of one company by another and represents the excess of the purchase price over the fair value of net identifiable assets. When the carrying value on the balance sheet exceeds the fair value, goodwill might be impaired, requiring a write-down to align with the lower fair value.
Step-by-step explanation:
When the fair value of goodwill is less than its carrying value on the balance sheet, an impairment test is performed to determine whether a write-down is necessary.
Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the net identifiable assets of an acquired company. It can be calculated as the purchase price minus the fair value of net identifiable assets.
Goodwill impairment occurs when the value of goodwill on a company’s balance sheet exceeds the fair value that can be realized from the acquired asset or unit. Goodwill impairment tests start by comparing the carrying value (including goodwill) of a reporting unit with its fair value.
If the carrying value exceeds the fair value, an impairment loss must be recognized, and the carrying value of goodwill must be written down on the balance sheet.
The impairment test is a two-step process that first involves calculating the fair value and then, if needed, measuring the impairment loss, which would be the amount by which the carrying amount exceeds the fair value of the goodwill.