Somebody please explain me how is residual income-models used to measure Goodwill Impairment…
I’ve never heard of RI models being used to measure goodwill impairment.
Where did you encounter it?
I found it in LOS 36B…Pg 370-371…
.It says abt the uses of residual income models…
“Standard setters have also proposed the use of residual income models to measure impairment of goodwill”
RI models can be used for equity valuation. Goodwill valuation comes into play when the parent consolidates a sub when they have controlling interest. Imagine you paid $900 million for 90% of a company. If the RI valuation of that sub is less than 1B, goodwill that was recognized at acquisition would be impaired. Of course, if the stock of the sub traded, we can use the market price as observed directly for evidence of impairment.