Which of the following methods is a valid method of accounting for goodwill? A) Subject to a monthly impairment test. B) Amortized over a specified period of time. C) Fully deducted against equity immediately. Your answer: A was incorrect. The correct answer was C) Fully deducted against equity immediately. Goodwill is no longer amortized under IFRS or US GAAP, but is rested regularly for impairment. The impairment test is annual, not monthly. Why is “C” correct? what accounting rules let you essentially write-off goodwill immediately and charge it against equity? I know “b” is wrong, but i’m not buying “a” as being wrong. Granted, you arent required to do it monthly, but is there anything forbidding you from doing it that frequently? i thought annually was a bare minimum, not a maximum…
Who says it needs to be monthly? If it is impaired it is deducted immediately…seems to be the better answer.
haha. Both A & B are obvious wrong answers! It should take you a less than a second to answer this question and move on. 
Goodwill is not amortized and it’s not tested for impairment monthly. It’s done annually. Easy question, dude.
but its not fully deducted against equity - it would be fully deducted against the income statement. I know B is wrong. Maybe i’m hung up on a “valid method of accounting”. Deducting goodwill immediately directly against equity implies bypassing the income statement - which would not be a “valid method of accounting” under US GAAP. Now, the requirements of impairment testing requires a test to be done annually, or more often if the circumstances dictate it. SO, while testing monthly would be extremely unusual and 99% of the time unecessary, i say it still is a “valid method of accounting”.
Fully deducted against equity immediately would be how you would make companies with differing amounts of goodwill on their balance sheets comparable. A reduced, E Reduced… compare companies without the effect of goodwill in them. So this is an analyst adjustment.
I am not an accountant, but i dont ever recall reading goodwill impairment reducing equity thru Income Statement. I would just answer C as the only choice. For Goodwill, it makes sense to reduce equity immediately rather than indirectly, without recording a loss in I/S first. Logic is, we never amortize Goodwill, so under normal conditions too, Goodwill never hits Income Statement. So, why should it hit I/S when it is impaired? For impairments of Tangible Assets, though, Equity WILL be reduced Indirectly, by recording a loss in I/S first. Because, under normal conditions too, tangible assets are anyways depreciated to their salvage value in I/S. So, any impairments on them too would also hit I/S first and then reduce equity.
I got this one wrong too. I picked A b/c it says to test for impairment “AT LEAST” annually so technically A could be correct.
rus1bus Wrote: ------------------------------------------------------- > I am not an accountant, but i dont ever recall > reading goodwill impairment reducing equity thru > Income Statement. I would just answer C as the > only choice. > > For Goodwill, it makes sense to reduce equity > immediately rather than indirectly, without > recording a loss in I/S first. > > Logic is, we never amortize Goodwill, so under > normal conditions too, Goodwill never hits Income > Statement. So, why should it hit I/S when it is > impaired? > > For impairments of Tangible Assets, though, Equity > WILL be reduced Indirectly, by recording a loss in > I/S first. Because, under normal conditions too, > tangible assets are anyways depreciated to their > salvage value in I/S. So, any impairments on them > too would also hit I/S first and then reduce > equity. Goodwill impairments are charged against income. What equity account would i be reducing in my adjustment? retained earnings?
This question sucks. A - It is not INVALID to test monthly, merely unnecessary. B - Clearly wrong. C - When impaired, goodwill should be expensed and run through the IS, so it wouldn’t be IMMEDIATELY taken out of equity. Also the answer choice dosen’t mention impairement. I imagine this question comes from Schweser, but CFAI tends to actually write way more cryptic questions. I suggest getting “used to it” as the proper methodology here…
johnnyblazini Wrote: ------------------------------------------------------- > This question sucks. > > A - It is not INVALID to test monthly, merely > unnecessary. > B - Clearly wrong. > C - When impaired, goodwill should be expensed and > run through the IS, so it wouldn’t be IMMEDIATELY > taken out of equity. Also the answer choice > dosen’t mention impairement. > > I imagine this question comes from Schweser, but > CFAI tends to actually write way more cryptic > questions. I suggest getting “used to it” as the > proper methodology here… THANK YOU, i felt like i was taking crazy pills and yes, it was a schweser.
smileygladhands Wrote: ------------------------------------------------------- > rus1bus Wrote: > -------------------------------------------------- > ----- > > I am not an accountant, but i dont ever recall > > reading goodwill impairment reducing equity > thru > > Income Statement. I would just answer C as the > > only choice. > > > > For Goodwill, it makes sense to reduce equity > > immediately rather than indirectly, without > > recording a loss in I/S first. > > > > Logic is, we never amortize Goodwill, so under > > normal conditions too, Goodwill never hits > Income > > Statement. So, why should it hit I/S when it is > > impaired? > > > > For impairments of Tangible Assets, though, > Equity > > WILL be reduced Indirectly, by recording a loss > in > > I/S first. Because, under normal conditions > too, > > tangible assets are anyways depreciated to > their > > salvage value in I/S. So, any impairments on > them > > too would also hit I/S first and then reduce > > equity. > > Goodwill impairments are charged against income. > > What equity account would i be reducing in my > adjustment? retained earnings? Sorry smileygladhands, my bad. You are correct, Goodwill impairments are charged as one line expense item in Income Statement and not directly reduce Equity as i was stating earlier. CFAI Vol 2 Page 48 Line 8. So, if it is included as a charge in I/S, it will be effecting Retained Earnings account in Shareholder’s Equity.