What triggers goodwill impairment in financial reporting?

• A. The acquirer overpaid for the seller and intangible assets are worth less.
• B. Goodwill increases when acquisitions happen.
• C. Goodwill is amortized over 20 years.
• D. Goodwill impairment is credit to other income.

Answer: (C)

The key idea is that goodwill impairment is about a decline in the value of the business unit, not about amortization. Under current accounting rules, goodwill is not amortized; instead, it is tested for impairment at least annually and whenever there are indications the unit’s value has fallen. The test compares the carrying amount of the reporting unit (which includes goodwill) to its recoverable amount (the value you could recover from the unit, based on fair value or value in use). If the recoverable amount is lower than the carrying amount, an impairment loss is recorded for the excess, limited to the goodwill on the books. So the trigger is a drop in the unit’s value relative to its carrying amount, not an amortization schedule. The other notions—overpayment as the trigger, goodwill increasing on acquisitions, or impairment being a credit to other income—don’t describe how impairment actually works, and impairment losses reduce net income as an expense, not as a credit to other income.