Sympo Ltd. acquired 100% of the commons shares of Grotto Co. This business combination resulted in $100,000 of goodwill. Sympo allocated the goodwill to three cash-generating units. At its year-end, Sympo conducts a goodwill impairment test. Which of the following statements about the impairment test is TRUE?
A)The impairment test is applied to Grotto Co. as a whole.
B)The impairment test is applied to the business combination as a whole.
C)Sympo is not required to conduct an impairment test unless its circumstances have changed materially from its previous year.
D)The impairment test is applied to each of the three cash-generating units to which goodwill has been allocated.

Question

Quizplus · Accepted Answer

Goodwill should be allocated to the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units or CGUs). Therefore, Sympo should conduct an impairment test for each of the three cash-generating units to which goodwill has been allocated. A is incorrect because the impairment test is not applied to the acquired entity, Grotto Co. as a whole, but to the CGUs of Sympo. B is also incorrect because the impairment test is applied to the CGUs, not the business combination as a whole. C is incorrect because Sympo is required to conduct an impairment test for any goodwill every year, regardless of whether there have been any material changes from the previous year.

Sympo Ltd Acquired 100% of the Commons Shares of Grotto Co