7.6 Testing for Goodwill Impairment. The tests for goodwill impairment are similar under U.S. GAAP and IFRS. Goodwill is not considered a separable asset; therefore, goodwill impairment is assessed at the reporting unit (U.S. GAAP) or cash-generating unit (IFRS) level. If the fair value of a unit exceeds its carrying amount (after impairment tests for tangible and intangible assets other than goodwill have been performed and carrying amounts adjusted), goodwill is impaired. The amount of goodwill impairment is obtained by comparing the carrying amount of goodwill to the goodwill implied by the difference between the unit’s fair value and its carrying value. U.S. GAAP tests for the impairment of amortizable intangibles first require a comparison of undiscounted future cash flows from the asset to the book value of the asset. If undiscounted future cash flows are higher, the asset is not impaired. IFRS follows the theoretically defensible approach of comparing the asset’s book value to the larger of the asset’s value in use (discounted future cash flows) and the asset’s value from sale (fair value less disposal costs) to ascertain whether goodwill is impaired and what the amount of the impairment is. Because of the difference between IFRS and U.S. GAAP rules on limited-life assets, goodwill impairment charges may differ between the two sets of standards. Recall that goodwill impairment tests depend on the carrying amounts of individual assets and liabilities that may differ between the two sets of standards.
7.10
Accounting for Available for Sale and Trading Marketable Equity Securities. Firms report both available-for-sale and trading marketable equity securities at fair value at the end of each reporting period. The reporting of any unrealized holding gain or loss depends on the firm’s purpose for investing in securities. Firms that actively buy and sell securities to take advantage of short-term differences or changes in market values classify the securities as trading securities, a current asset on the balance sheet. Firms include unrealized holding gains and losses on trading securities in the calculation of net income each reporting period. Firms classify marketable equity securities that do not qualify as trading securities as securities available for sale, including them as either current or noncurrent assets depending on the expected holding period. Unrealized holding gains or losses on securities available for sale are not included in net income each period; instead, they appear as a component of other comprehensive income, labeled Unrealized Holding Gain or Loss on Securities Available for Sale. The cumulative unrealized holding gain or loss on securities available for sale appears in the shareholders’ equity section of the balance sheet as part of Accumulated Other Comprehensive Income. When a firm sells a trading security, it recognizes the difference between the selling price and the book value (that is, the market value at the end of the most recent accounting period prior to sale) as a gain or loss in measuring net income. When a firm sells a security classified as available for sale, it recognizes the difference between the selling price and the acquisition cost of the security as a realized gain or loss. At the time of sale, the firm must eliminate any amount in the shareholders’ equity account, Accumulated Other Comprehensive Income, for the unrealized holding gain or loss related to that security.
7.11 Equity Method for Minority, Active Investments.
a. Equity income of $35.14 million (.35 x $100.4 million) will be reported by Ace Corporation for 2010.
b. The statement of cash flows for Ace Corporation will report a net reduction in operating cash flows of $26.39 million due to undistributed earnings of the investee. Recall that $35.14 million of equity income is already shown in the operating cash flow section under the indirect method, but dividends received in cash equals
