Due to a negative news article that alleged the food products of a subsidiary of

Question

Due to a negative news article that alleged the food products of a subsidiary of a client were tainted, sales of the company’s products plummeted last year. Accordingly, your firm proposed a journal entry for a goodwill impairment based on the severe decline in sales and profits. The client originally agreed to the write down, but new articles have just come out alleging the original news reports to be false. Sales are slowly picking up again for the subsidiary. Since the audit opinion has not been issued yet, the CFO now wants to reconsider the write down for goodwill impairment since it appears that sales will be back to previous levels within a couple of months, based on current orders in the pipeline. How would you respond to the CFO’s request?

Explanation / Answer

Impairments of any assets ares done when its fair market value is lessor than the carrying value, the same holds true for Goodwill also, when the company here realizes that the fair value of subsidiary unit had come down and is even lessor than the carrying value of the susbsidiary unit, they decided to do for impairment but important thing to note here is that the loss shown by the subsidiary does not reduce the fair value suddenly, it took time and over the period it happpened, since the realty is impairment if goodwill is needed here, it suddenly can not turn into positive fair market value of subsidiary, hence auditors can tell CFO thatthey shoul give time to see how much recovery is made on sales term and loss recovery term, then in next year they can reverse the impairment.

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