Mustang Corp. acquired Cobra Co. 5 years ago. As a part of the acquisition, Mustang reported goodwill of 750k. For the year just ended, Mustang gathered the following data:
Fair value of Cobra = $5M
Carrying value of Cobra (incl. goodwill) = 5.2M
Identifiable net assets of Cobra at fair value = 4.5M
Using US GAAP, the goodwill is:
A) impaired and a loss of 200k is recognized
B) impaired and a loss of 250k is recognized.
C) not impaired.
I understand that the asset (Cobra Co.) is impaired using the recoverability test: carrying value is indeed > asset’s future undiscounted cash flows (info we don’t have, so in lieu using fair value–is this acceptable?).
I chose (A) because the loss measurement, as far as I understand, is = carrying value - fair value of the asset. So, why not 5.2M - 5M = 200k?
Why is the answer (B)? I understand the calculation (4.5M + 750k - 5M), just not the thinking around it. Is it because the “implied” carrying value (including goodwill) is really 4.5M+750k even though the question gives you an explicit carrying value including goodwill?
For goodwill, you are supposed to compare the undiscounted future CFs to the carrying value for step 1, but since that is not given, I would say you’re right.
I believe under US GAAP, long lived assets are recorded on the balance sheet at Carrying Value and NOT at Fair value. And then impairment only occurs when carrying value is less than undiscounted cash flow.
Schweser says and i quote: “Under US GAAP, most long lived assests are reported on the balance sheet at depreciated cost. There is no Fair Value alternative for asset reporting under US GAAP”
Why are we impairing goodwill using the fairvalue of the company and not it’s carrying value?
Would it be a better strategy to stay off practise questions at this point to avoid utterly confusing, twisted questions like this from throwing off the balance the things i’ve spent many hours studying?
)