Financial Reporting > SFAS 142 - Goodwill Impairment

Under SFAS 142, goodwill impairment studies are conducted annually—or more frequently if significant legal or economic changes have occurred—through a two-step process. First, each of the company’s separate reporting units is tested for evidence of impairment. This is done by comparing the fair value of the reporting unit (as a business enterprise) to its carrying value. If the fair value falls below the carrying value, the second step of the study is called for, in which each asset is measured at its fair value to determine where the impairment resides—perhaps not in goodwill at all.

Impairment studies can demand significant resources for a company every year. If a good foundation is laid at each acquisition, though, resource demands can be substantially diminished.