Valuations for Financial Reporting under SFAS 142
A valuation for SFAS Statement No. 142 is potentially a two-step valuation process.
The first step of the goodwill impairment test, used to identify potential impairment,
compares the appraised fair value of the invested capital of a reporting unit with the carrying (book)
value of its invested capital amount, including goodwill. If the appraised fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired.
If the carrying amount of the reporting unit exceeds the appraised fair value, the second step of the goodwill
impairment test is necessary in order to measure the amount of impairment loss, if any.
The second step of a goodwill impairment test, compares the implied (appraised) fair value of
the reporting unit's goodwill with the carrying amount of that goodwill. In order to determine the amount
of impairment (if any), a full purchase price allocation valuation must be performed in the same manner
as when a business combination is determined.
In other words, as part of the second step, the entity must allocate the appraised fair value of a reporting unit
to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a Business Combination (see SFAS 141)
and the fair value of the reporting unit was the price paid to acquire the reporting unit.
Once the assets in the second step have been appraised, the excess of the appraised fair value of a
reporting unit over the appraised amounts of its assets and liabilities is the implied fair value of goodwill.
It should be noted that this second step allocation valuation is only performed for purposes of testing
goodwill for possible impairment. The entity subject to the goodwill impairment valuation cannot write up
or write down a recognized asset or liability, nor can it record a previously unrecognized intangible
asset as a result of the valuation. In addition, after a goodwill impairment loss is recognized, the adjusted
carrying amount of the goodwill is its new accounting basis.
Reversal of Goodwill Impairment in the event the value of the reporting unit later increases:
SFAS 142 prohibits subsequent reversal of a previously recognized goodwill impairment loss.
Therefore goodwill can't be written back up to pre-impairment levels.
Intangible Assets subject to impairment review testing under FASB 142 include:
Any intangible asset assigned an indefinite life, such as trademarks, trade names, renewable import
licenses, taxicab medallions, F.C.C. licenses, etc. Generally, there are very few categories of
intangible assets that meet the criteria of indefinite lived.
The definition of fair value as stated in SFAS No. 142 is:
The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
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