Is goodwill amortized under current US GAAP/IFRS? How is it tested and adjusted over time?
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The answer
Goodwill is not amortized under current US GAAP or IFRS. Instead, it is tested for impairment at least annually and whenever a triggering event suggests the fair value of the reporting unit may have fallen below its carrying value.
If that occurs, I record a non-cash impairment charge that reduces pre-tax income and the goodwill balance on the balance sheet, with no cash outflow in that period because the cash was already spent in the original acquisition. It is a one-way adjustment: under US GAAP, once goodwill is written down, it can never be reversed, even if the business later recovers.
Separately, identifiable intangible assets with finite lives are amortized over their useful lives, but for public companies goodwill has no scheduled amortization; its carrying value only changes through impairment or by adding new goodwill from subsequent acquisitions.
Balance sheet
| Cash | 150 |
| Accounts receivable | 120 |
| Inventory | 90 |
| Total current assets | 360 |
| PP&E, net | 400 |
| Goodwill | 150 |
| Other assets | 40 |
| Total assets | 950 |
| Accounts payable | 80 |
| Deferred revenue | 40 |
| Total current liabilities | 120 |
| Long-term debt | 380 |
| Total liabilities | 500 |
| Total equity | 450 |
| Total liabilities & equity | 950 |
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- A sponsor structures an acquisition as an asset purchase, creating $180 of tax-deductible goodwill amortizable over 15 years, at a 26% tax rate. Calculate the annual cash tax benefit, and explain why this benefit does not appear in reported GAAP net income.
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The rest of this topic
Purchase accounting: goodwill, write-ups and the tax basis