Accounting for Goodwill
US GAAP – SFAS 142
Goodwill is not amortized but tested annually for a loss in value or impairment. As a part of the assessment, the carrying value of the asset must be compared to the fair value (sum of undiscounted cash flows) of the reporting unit. If the carrying value is less than the fair value, the asset is written down and the company records a loss during the period.
Intangibles with finite lives should be amortized over their useful lives.
Examples of intangibles with finite lives:
- computer software
- patents
- copyrights
- motion picture films
- customer lists
- mortgage servicing rights
- licenses
- import quotas
- franchises
- customer and supplier relationships
- marketing rights
IFRS
As in US GAAP, goodwill is not amortized but tested annually for a loss in value or impairment. The difference is that during the assessment, the carrying value of the asset is compared to the present value of cash flows of the reporting unit. If the carrying value is less than the present value, the asset is written down and the company records a loss during the period.
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