Goodwill Impairment Loss

CFA Level II FRA
#1

Anyone done this question on the topic test? I don’t understand how they calculated the goodwill impairment loss.

The question uses US GAAP

**Part A: Values at Acquisition, 1 January 2014 ($ thousands)****Book Value **Fair Value Current assets 120 120 Plant and equipment (P&E) * 2,280 2,964 Land 1,440 1,476 3,840 4,560 Liabilities 1,200 1,200 Net assets 2,640 3,360

She believed that Great Lakes’ share of local advertising would continue to decline with the growth of regional based mobile and social media advertising. With little chance of a permanent recovery in the investment, Munroe believed that Suburban would most likely have to treat the investment as being impaired.

Book value of Great Lakes 3,256.00 Fair value of Suburban’s investment in Great Lakes 940 Carrying value of Suburban’s investment in Great Lakes

1,264.51

The answer is a 324.51 impairment loss. This makes zero sense.

#2

Why not? 1264-940?

#3

Isn’t that how IFRS calculates it?

#4

Yes but you have no other information about implied goodwill

#5

This is not goodwill impairment bro this is impairment of a subsidiary accounted for using equity method this is different from impairing goodwill from an acquisition method if you realize that u will see there zero problem just go back to the notes

#6

So are you referring to impairments of investments in associates?

#7

Are you sure goodwill impairments are treated differently according to inter corporate investments?

#8

Can anyone help with this?

#9

I agree. I feel the answer is wrong

The step 2 seems wrong based on the Kaplan notes.

Step 1 compare the carrying amount of the sub to the Fair Value of the sub, if carrying value > Fair value, then go to step 2 - Compare the carrying value of goodwill to the implied value of goodwill. and the difference is the impairment of the goodwill.

So in this case step 2 would be Carrying value of goodwill when initially make the purchase = 1365-3360*.325 = 273. Implied goodwill = FV of sub - FV of Net asset = 1264.51 - 3360*.325 = 172.51

Impairment of gw = 273- 172.51= 100.49

Do you guys agree?

#10

Sounds to me like your applying the acquisition method. Equity method is more straight forward for Impariment. Just calculate the imparment as the drop in value between Carrying VAlue & Fair value.

For aquisition method under US GAAP, I beleive you need to use full goodwill (not partial) and calculate it as the difference between the original full GW amount & the what the new goodwill amount would be based on (Fair Val minue FMV net Identifiale assets)