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 ASC 805) 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.