Because Goodwill Only Produces Cash Flows in Connection with Other

question 18

Essay

Because goodwill only produces cash flows in connection with other assets, it is tested for impairment within the context of its reporting unit. Assume that an assessment of qualitative factors indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying value, describe the ensuing two-step quantitative impairment test.
Required:
Briefly describe the process for testing for impairment of goodwill.

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Definitions:

Profitability Index

A financial metric that calculates the ratio of the present value of future cash flows from an investment to the initial investment cost, used to evaluate the desirability of projects.

Present Value

Present value refers to the current value of a future amount of money or series of cash flows, calculated using a specific rate of return.

Net Present Value

A calculation used to assess the profitability of an investment, considering the difference between the present value of cash inflows and outflows over a period of time.

Internal Rate of Return

A financial metric used to evaluate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows from a particular project equal to zero.