Goodwill project: Bobby’s Donuts

Bobby's Donuts is a goodwill endeavour. Donuts & Coffee, located on the corner of Geary and Masonic Streets in San Francisco, CA, first opened its doors in 2018.

Goodwill project: Bobby’s Donuts
Requirement 1:
Goodwill is the difference between the amount paid to the seller and the fair value of the assets
acquired.
Goodwill of Bobby’s Donuts at acquisition on December 31, 2018=
Amount paid: $52,000
Less:
Fair value of net assets: ($42000)
Goodwill: $10,000
Working: net fair value= Assets (45000+12000+9000+1000+15000+29000) – liabilities
(41000+20000+8000)
= $111,000- $69000
= $42000
Citation:
ASC 805-30-30-1
The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b): a. The aggregate of the following:
o 1. The consideration transferred measured in accordance with this Section, which generally requires acquisition-
date fair value (see paragraph 805-30-30-7)
o 2. The fair value of any noncontrolling interest in the acquiree
o 3. In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held
equity interest in the acquiree.
 b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured
in accordance with this Topic.
Requirement 2:

During 2019, Bobby’s Donuts incurred huge losses and its future earnings and expected cash
flows were affected in a negative way. The company was incurring losses and the economic
projectory was devastating. There was an increase in raw materials and labor costs too which led
the company management to conclude that it is more likely than not that the fair value of
Bobby’s Donuts is less than its book value (i.e., carrying amount). Therefore, an impairment test
should be specifically considered in accordance with accounting standards codification.
Citati on:
35-3A
An entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more
than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill.
35-3B
An entity has an unconditional option to bypass the qualitative assessment described in the preceding paragraph for
any reporting unit in any period and proceed directly to performing the first step of the goodwill impairment test.
An entity may resume performing the qualitative assessment in any subsequent period.
35-3C
In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, an entity shall assess relevant events and circumstances. Examples of such events and circumstances
include the following: a. Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing
capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
 b. Industry and market considerations such as a deterioration in the environment in which an entity operates, an
increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute
terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political
development
 c. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and
cash flows
 d. Overall financial performance such as negative or declining cash flows or a decline in actual or planned
revenue or earnings compared with actual and projected results of relevant prior periods
 e. Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers;
contemplation of bankruptcy; or litigation
 f. Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a
more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for
recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in
the financial statements of a subsidiary that is a component of a reporting unit
 g. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers). 35-3D
 If, after assessing the totality of events or circumstances such as those described in the preceding
paragraph, an entity determines that it is not more likely than not that the fair value of a reporting unit is

less than its carrying amount, then the first and second steps of the goodwill impairment test are
unnecessary.
35-3E
If, after assessing the totality of events or circumstances such as those described in paragraph 350-20-35-3C(a)
through (g), an entity determines that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, then the entity shall perform the first step of the two-step goodwill impairment test.
35-3F
The examples included in paragraph 350-20-35-3C(a) through (g) are not all-inclusive, and an entity shall
consider other relevant events and circumstances that affect the fair value or carrying amount of a reporting unit in
determining whether to perform the first step of the goodwill impairment test. An entity shall consider the extent to
which each of the adverse events and circumstances identified could affect the comparison of a reporting unit’s fair
value with its carrying amount. An entity should place more weight on the events and circumstances that most affect
a reporting unit’s fair value or the carrying amount of its net assets. An entity also should consider positive and
mitigating events and circumstances that may affect its determination of whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If an entity has a recent fair value calculation for a
reporting unit, it also should include as a factor in its consideration the difference between the fair value and the
carrying amount in reaching its conclusion about whether to perform the first step of the goodwill impairment test.
35-3G
An entity shall evaluate, on the basis of the weight of evidence, the significance of all identified events and
circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. None of the individual examples of events and circumstances included in
paragraph 350-20-35-3C(a) through (g) are intended to represent standalone events or circumstances that
necessarily require an entity to perform the first step of the goodwill impairment test. Also, the existence of positive
and mitigating events and circumstances is not intended to represent a rebuttable presumption that an entity should
not perform the first step of the goodwill impairment test.
Requirement 3:
As of 31 December 2019, the book value of Bobby’s Donuts is $45000 including goodwill and
the fair value is $30,000. Since the book value exceeds fair value, there is a need for impairment
testing. The goodwill of the company needs to be impaired. Book value excluding goodwill=
$35000.
Fair value: 30000
Less: Book value: (35000)
Excess of value: ($5000)
Goodwill: 10000
Impairment: (5,000)
New Goodwill: $5000

Citati on:
35-4
The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill.
35-6
If the carrying amount of a reporting unit is greater than zero and its fair value exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired; thus, the second step of the impairment test is
unnecessary. If the carrying amount of the reporting unit is zero or negative, the guidance in paragraph 350-20-35-
8A shall be followed.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired.
35-8
If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test
shall be performed to measure the amount of impairment loss, if any.
If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, an
entity shall consider the income tax effect from any tax deductible goodwill on the carrying amount of the reporting
unit, if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss.
35-8A
If the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be
performed to measure the amount of impairment loss, if any, when it is more likely than not (that is, a likelihood of
more than 50 percent) that a goodwill impairment exists. In considering whether it is more likely than not that a
goodwill impairment exists, an entity shall evaluate, using the process described in paragraphs 350-20-35-3F
through 35-3G, whether there are adverse qualitative factors, including the examples of events and circumstances
provided in paragraph 350-20-35-3C(a) through (g). In evaluating whether it is more likely than not that the
goodwill of a reporting unit with a zero or negative carrying amount is impaired, an entity also should take into
consideration whether there are significant differences between the carrying amount and the estimated fair value of
its assets and liabilities, and the existence of significant unrecognized intangible assets.
> > Step 2

35-9
The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the
implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
35-10
The guidance in paragraphs 350-20-35-14 through 35-17 shall be used to estimate the implied fair value of
goodwill.
35-11
If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of
goodwill.
Requirement 4:
Accounting entry:
Debit Impairment loss 5,000
Credit Goodwill 5000
Requirement 5:
After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall
be its new accounting basis. Therefore the new goodwill of Bobby’s Donuts is $5000.
Requirement 6:
If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill,
an impairment loss shall be recognized in an amount equal to that excess. The loss recognized
cannot exceed the carrying amount of goodwill.
Therefore the maximum impairment loss that can be recorded on 31 December 2020 will be
$5000 resulting the goodwill to be 0.
Citati on:
35-11
If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of
goodwill.

35-12
After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new
accounting basis.
Requirement 7:
Lindsey Kline is incorrect about her assumption of US GAAP goodwill recovery. Goodwill
impairment testing is mandatory at end of every year. Once goodwill is impaired it cannot be
reversed.
Citati on:
350-20-35-78 After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be
its new accounting basis, which shall be amortized over the remaining useful life of goodwill. Subsequent reversal
of a previously recognized goodwill impairment loss is prohibited