Equity Method - Goodwill

CFA Level II FRA
#1

In the FRA book, page 134 of the CFAI discusses goodwill for equity method investments. It says “any remaining difference between the acqusition cost and the fair value of net identificable assets that cannot be allocated to specific assets is treated as goodwill and is not amortized. Instead it is reviewed for impairment on a regualr basis, and writtend down for any identified impairment. Goodwill, is however included in carrying value…”

Then, on page 138, it discusses the impairment process, as a whole, for equity method investments and goes on to say “…because goodwill is included in the carrying amount of the investment and is not separately recognized, it is not separately tested for impairment.” It goes on to further say, "section 6.4.5 of this reading discusses impoariment test for goodwill attributable to a controlling interest. Note the distinction between the disaggreated goodwill impairment test for consolidated statements and the total fair value impariment test for equity method investments."

As a CPA, I do not believe that the goodwill in an equity method investment is tested separately for impairment, as properly desribed on page 138, however, I am confused by the sentence on page 134 which seems to imply that goodwill is tested separately for equity method investments. Any thoughts? Is this an error in the CFAI cirrculum?

#2

Looks like the keyword there is “separately.” Goodwill is indeed regularly tested for impairment against the asset’s fair value. But since it is included in the carrying value on the balance sheet, it is not SEPARATELY tested for impairment, rather it is tested as a whole.

#3

Agree with skwak. Carrying value (which included goodwill) under equity method is tested for impairment regularly and written down if warranted. Don’t agree that it is “tested for impairment against the asset’s fair value.” That does not make any sense. Goodwill arises in the first place because the carrying value (purchase price) is higher than fair value in the first place (upon acquisition).

#4

I think it is just unclearly written but everything you have in the book is correct. Goodwill is separately tested for impairment in consolidation, i.e. when you prepare consolidated accounts. The first sentence shows general rule of how any impairment on goodwill is calculated. In respect of equity method you don’t test goodwill for impairment but you test the entire investment. Don’t you think this is what they say?