CFA CFA Level 1 Question of the Week – Financial Reporting – Goodwill

Question of the Week – Financial Reporting – Goodwill

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    • exam_whiz
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      Company X acquired Company Y for $800 million. At the time of acquisition, Company Y’s book value of assets and liabilities was $1.5 billion and $850 million respectively, while fair value assessment came to $1.8 billion and $1.2 billion respectively. What amount of goodwill should Company X record on its balance sheet? Is it necessary for Company X to amortize goodwill?

      • $150m goodwill, no amortization necessary
      • $200m goodwill, no amortization necessary
      • $50m goodwill, amortization is necessary
    • cassieguo1987
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      eager to know the right answer!

    • exam_whiz
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      Spoiler alert! The correct answer is B.

      Goodwill is calculated as the difference between purchase price and fair value of the business being purchased. In this case, goodwill = $800 million – ($1.8 billion – $1.2 billion) = $200 million. Amortization of Goodwill is not required whether under U.S. GAAP or IFRS, but is rather subject to an annual impairment test.

    • shannondaily
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      Woo! I got it right. 🙂 

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