Q: Is goodwill amortized?
A: Not for public companies under US GAAP. Goodwill is tested for impairment at least annually instead. Private companies may elect to amortize goodwill on a straight-line basis over ten years or less.
Goodwill in Accounting
Metadata
- Category
- Balance Sheet
- Units
- Currency
- US-GAAP elements
GoodwillGoodwillImpairmentLoss- Reference
- Regulation S-X Rule 5-02.15 (Intangible assets); ASC 350 and ASC 805
- Source
- Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)
Definition
Goodwill in accounting is the part of an acquisition's purchase price that cannot be assigned to any specific asset the buyer received. When one company acquires another, it records each identifiable asset and liability at fair value. Whatever the buyer paid above the net of those fair values is recorded as goodwill.
Goodwill stands for benefits that cannot be separately identified, such as an assembled workforce, expected synergies, and the value of the acquired business as a going concern. It appears on the balance sheet only through acquisitions. A company cannot record goodwill it builds internally.
Details
Goodwill is measured under ASC 805, Business Combinations, and accounted for afterward under ASC 350. Public companies do not amortize goodwill. Instead, they test it for impairment at least once a year at the reporting-unit level, and sooner if events suggest its value has fallen. If a reporting unit's carrying amount exceeds its fair value, the company writes goodwill down by the difference, but never below zero. Under US GAAP a goodwill impairment cannot be reversed later.
The balance-sheet figure, tagged Goodwill in XBRL, is shown after accumulated impairment losses. Write-downs taken during a period are tagged GoodwillImpairmentLoss and usually appear as their own line on the income statement. Regulation S-X Rule 5-02.15 requires companies to show each class of intangible asset separately if it exceeds five percent of total assets, which is why goodwill normally has its own line.
Because goodwill cannot be sold separately and gives creditors little in a liquidation, analysts often subtract it, along with other intangibles, to get tangible book value. A large goodwill balance relative to equity shows how much of a company's book value rests on prices it paid for past acquisitions.
FAQ
Q: What does a goodwill impairment tell investors?
A: It signals that an acquired business is now worth less than the company carries it at, and often that the company overpaid. The charge is non-cash, but it lowers reported earnings and equity.
Q: Can goodwill be negative?
A: No. If a buyer pays less than the fair value of the net assets it acquires, the difference is a bargain purchase. It is recognized immediately as a gain in earnings, not recorded as negative goodwill.
Related Terms
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