How is goodwill tested for impairment?

Goodwill is tested for impairment at least annually because it is an indefinite-lived intangible asset, which means it does not have a predictable useful life. This requirement ensures that the carrying amount of goodwill on the financial statements is not overstated over time. The annual impairment testing process involves comparing the carrying amount of the reporting unit, including goodwill, to its fair value. If the fair value is less than the carrying amount, an impairment loss is recognized to reduce the goodwill to its fair value. This consistent annual review maintains the integrity of financial reporting and provides a timely assessment of any potential declines in value due to changes in market conditions, business performance, or other factors.

The other options do not align with the accounting standards for the testing of goodwill. Testing every quarter can be excessive and impractical, while conducting tests every two years may fail to capture impairment in a timely manner. Testing only when a loss is suspected can lead to a lack of proactive management over goodwill valuation, potentially resulting in significant adjustments after the fact, rather than allowing for continuous monitoring. Thus, annual testing strikes a balance between thoroughness and practicality, ensuring that any decline in the value of goodwill is addressed appropriately.