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Under FASB Statement 141, Business Combinations, and
Statement 142, Goodwill and Other Intangible Assets,
management must identify reporting units that will test goodwill for impairment, allocate purchase prices of
past acquisitions with existing goodwill to
those units, and determine identifiable
intangible assets separate from goodwill.
Under the FASB rules, most identifiable intangible assets will need to be amortized. In the past, companies simply
aggregated goodwill and other intangibles into one line item and amortized it all together.
Consider the new two-step impairment test: Management calculates the fair value of each reporting unit and compares that to each reporting unit's book value. If the book value is determined to be below the fair value assessment, there is no impairment loss. But if the fair value is below book, this means that goodwill has been
impaired, and a company needs to perform the second step.
The second step similarly takes the difference between the fair value of goodwill and its book value to determine how much a company will have to write off.
Companies will also have to develop methodologies and likely use costly outside valuation experts for the reporting unit and identifiable intangible asset appraisals lest they face a potential inquiry by the Securities and Exchange Commission or, worse, a restatement.
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