1. To: Acme Corp. Controller
From: James Phillips
RE: Goodwill and Goodwill Impairment in GAAP
Date: November 18, 2015
This memo should be able to answer the two points raised by you, the Controller at Acme Corp.,
with specific FASB Accounting Standards Codifications according to the requirement. The
requirements that you asked for that shall be responded to in this memo are:
1. The meaning of “Goodwill” acquired; what it is; how it is measured at acquisition; and
the two criteria used by FASB to recognize “identifiable” intangible assets which are
separately reported from Goodwill.
2. The annual Goodwill Impairment test for subsidiaries A and B.
Goodwill is an asset on the books of one company which acquired another company for more
than its fair value. The “Goodwill” asset signifies the presumed future benefits from assets of the
acquiree which cannot be recognized in and of themselves. “ASC 805-30-20”.
At the acquisition date (the date at which the acquirer acquirers the acquiree) Goodwill is
measured as the consideration given by the acquirer, plus the fair value of net non-controlling
interests in the acquiree, plus any previously-owned equity in the acquiree by the acquirer, all
subtracted by the fair value of “identifiable” net assets of the acquiree “ASC 805-30-30-1”.
For example, if Acme decided to purchase 60% of the stock of company C, paid $60,000 for that
60% ownership, the fair value of the 30% non-controlling interest’s worth of stock is $30,000,
and the firm already owned 10% of company C stock worth $10,000, then the fair value of C
would be the net of those of $100,000. If the fair value of C’s net identifiable assets was actually
$80,000 instead of the full $100,000 though, then the Goodwill asset that would be put on
Acme’s books upon purchasing the additional 60% ownership would come out to be $20,000.

2. An asset will be considered identifiable by FASB if it meets either one of the following criteria:
1. Regardless of intention by the company of the asset, the asset is able to be separated from
the company for sale, transfer, rent, etc.
2. The asset had emerged due to some legal right. “ASC 805-30-20”
Goodwill impairment must be tested for at least once a year, and at the same time every year.
Goodwill impairment will be tested for based on the reporting unit (one level below an operating
segment “ASC 350-20-20”; in this case, the “reporting unit” will be the respective subsidiary)
that Goodwill has been assigned to. Impairment itself occurs when the book value of the
Goodwill asset is greater than the implied fair value of Goodwill for that reporting unit, and thus
an Impairment Loss must be incurred “ASC 350-20-35-2”.
Goodwill impairment testing is done in up to two steps. Simply put, step 1 compares carrying
and fair values of a reporting unit, and if the carrying amount is greater than the fair value, then
step 2 must be done “ASC 350-20-35-4 through 8A”. Simply put, step 2 compares the implied
fair value of the reporting unit’s Goodwill and the carrying amount of its Goodwill, with the
difference being the Impairment Loss “ASC 350-20-35-9 through 13”.
For the two subsidiaries in question for Acme Corp. (A and B), let us go through the steps for
each with the information given in your original memo.
Step 1: We need to compare the fair value of each reporting unit with its respective
carrying amount (Goodwill included)
A: Fair value of reporting unit: 314,000,000
Carrying amount of reporting unit: 337,000,000 (321,000,000 + 16,000,000)
B: Fair value of reporting unit: 150,000,000

3. Carrying amount of reporting unit: 133,100,100 (113,000,000 + 20,100,000)
For subsidiary A, the carrying amount is greater than the fair value of the
reporting unit, therefore Goodwill is considered impaired, and step 2 must be performed. For
subsidiary B, the carrying amount is less than the fair value, and therefore Goodwill is not
considered impaired, and thus step 2 can be skipped.
Step 2: We now must compare the implied fair value of the reporting unit’s Goodwill
with the carrying amount of the reporting unit’s Goodwill.
A: The Goodwill Impairment Loss will be the difference between the implied fair
value of the Goodwill asset and the carrying value of the Goodwill asset. The fair
value of Goodwill can be computed as the difference between the fair value of the
reporting unit ($314,000,000) and the fair value of the reporting unit’s identifiable
net assets (tangible net assets of $92,850,000; recognized intangibles of
$116,000,000; unrecognized intangible database of $16,000,000; unrecognized
intangible workforce of $4,000,000; unrecognized intangible use rights of
$5,000,000; and unrecognized intangible R&D of $69,000,000; totaling
$302,850,000), the difference being $11,150,000. The carrying value of Goodwill
was given in the data you provided at $16,000,000. The Goodwill Impairment
loss is, then, [$16,000,000 - $11,150,000], or $4,850,000.
B: No step 2 is necessary due to the carrying amount of Subsidiary B being less
than the fair value of Subsidiary B, as shown in step 1.
So in the end, Subsidiary A did require impairment to Goodwill of $4,850,000 and Subsidiary B
did not require any adjustment to Goodwill whatsoever. I hope you now have a better
understanding of recognizing identifiable intangible assets reported separately from Goodwill,

4. what Goodwill is, how to measure Goodwill at the time of acquisition of the respective reporting
unit, and the subsequent processes of determining if an impairment to Goodwill should be
necessary and for how much. I hope I provided enough detail where necessary to emphasize how
each respective component works, where applicable, and that I did not provide unnecessary
detail in regards to information you knew already or were not looking for. If further clarification
is needed, please feel free to contact me again, and I will be pleased to continue to help in any
way that I can.