How is goodwill impairment determined under U.S. GAAP?

• A. By comparing the carrying value to the fair value of the parent company
• B. By comparing the carrying value of the reporting unit to its fair value
• C. By assessing the earnings potential of the subsidiary
• D. By calculating the book value versus market value of all assets

Answer: (B)

Goodwill impairment under U.S. GAAP is assessed by comparing the carrying value of the reporting unit, which includes goodwill, to its fair value. This assessment is conducted as part of an annual impairment test or whenever there is an indication that goodwill might be impaired.

When determining impairment, if the fair value of the reporting unit is less than its carrying value, an impairment loss is recognized. The impairment loss is measured as the difference between the carrying amount of the reporting unit and its fair value. This process ensures that goodwill on the balance sheet accurately reflects the economic reality of the reporting unit’s value.

The other options do not align with the established method for assessing goodwill impairment under GAAP. For example, assessing the earnings potential of the subsidiary does not directly indicate whether goodwill is impaired, and calculating the book versus market value of all assets is not the standard process for testing goodwill impairment. Instead, U.S. GAAP requires the focus specifically on the reporting unit and its fair value in relation to goodwill.