An Impairment Test for Goodwill: An Application of Residual Income Valuation

Goodwill is impaired when its carrying value on the balance sheet is deemed to be more than its value. But how does one assess this? The residual income valuation method of this book is set up for the task for it starts with book value than adds value to that book value if expected future earnings are in excess of earning as the cost of capital. So,

Accordingly, if expected residual earnings are less than zero, the value of goodwill is less than its book value: Impair.