Goodwill impairment usually occurs when:

• A. The acquirer overpaid for the seller and the assets are worth less than expected.
• B. A company increases stock-based compensation.
• C. A company increases its revenue without changing costs.
• D. Tax rates rise significantly.

Answer: (A)

Goodwill impairment happens when what was paid for an acquisition no longer appears recoverable from the business. In practical terms, if the acquirer overpaid for the seller and the assets prove to be worth less than expected, the value assigned to goodwill on the balance sheet is no longer justified by the future benefits the business is expected to generate. That gap means the implied value of goodwill is lower than its carrying amount, so an impairment write-down is required to bring goodwill down to its recoverable value. The other scenarios don’t indicate a loss in the recoverable value of the acquired assets: higher stock-based compensation affects expenses but not the impairment of purchased goodwill; a rise in revenue without higher costs improves profitability rather than reducing asset values; and higher tax rates affect after-tax income, not the recoverable amount of goodwill.