Goodwill impairment testing is required to be performed annually or when indicators of impairment exist. What is compared to determine impairment?

• A. Recoverable amount to carrying amount
• B. Fair value to historical cost
• C. Current year profits to prior profits
• D. Market share to market value

Answer: (A)

Goodwill impairment testing is about comparing the asset’s carrying amount with its recoverable amount. The carrying amount is what is reported on the balance sheet for goodwill. The recoverable amount is the higher of fair value less costs to dispose and value in use (the present value of expected future cash flows). If the carrying amount exceeds the recoverable amount, an impairment loss is recognized, reducing goodwill to the recoverable amount. This ensures the carrying value reflects the underlying economic benefits expected to be received. The other options don’t reflect how impairment is measured: impairment isn’t determined by comparing fair value to historical cost, profits from year to year, or market share to market value.