This usually occurs when the target company cannot or will not negotiate a fair price for its acquisition. Impairment occurs when the market value of assets decline below the book value.
Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet.
As a value investor, the loss of the goodwill write-offs would be upsetting because companies that had engaged in large acquisitions under the old method tended to have artificially depressed earnings per share.
Goodwill, Defined Because goodwill doesn't have a physical form, it's considered an intangible asset. Goodwill impairment testing is complex, and can involve things such as performing a discounted cash flow analysis of expected cash flows from patents, for example, but the idea behind the new goodwill treatment is that the value of an ongoing businessa solid business with a lot of franchise valuerarely declines and, in fact, grows.
When the pooling of interest method was used, the balance sheets of the two businesses were combined, and no goodwill was created. Because the components that goodwill is composed of have subjective valuesthere is a substantial risk that a company could overvalue goodwill in an acquisition.
Next, they estimate the new, impaired goodwill value.
It wasn't an accident that these forces played a role in the sectors and industries that produced the greatest investment opportunities of the past century.
Goodwill now remains on the balance sheet as an asset, with no annual write-offs, unless it is deemed to be impaired. The reason for this is that, at the point of insolvency, the goodwill the company previously enjoyed has no resale value. Goodwill is also recorded when the purchase price of the target company is higher than the debt that is assumed.