Under GAAP, is goodwill amortized, or is impairment the primary method of accounting for it?

Under GAAP, is goodwill amortized, or is impairment the primary method of accounting for it?

• A. Yes, amortized over 10 years.
• B. Not amortized, impairment testing required.
• C. Yes, amortized over 5 years.
• D. Depends on the industry.

Answer: (B)

Goodwill is not amortized under GAAP. Instead, it is tested for impairment on a regular basis because its value can change due to events after the acquisition, and there isn’t a fixed useful life to allocate over. Under GAAP, you perform an impairment review at least annually for goodwill, and more often if there are indicators that value may have declined. The test compares the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recorded. If the fair value is lower, you recognize an impairment equal to the excess of carrying amount over the fair value, limited to the amount of goodwill allocated to that unit. For example, if the unit’s carrying amount (including goodwill) is 95 and its fair value is 85, you would recognize impairment of 10, reducing the goodwill accordingly (down to the extent of that impairment, not exceeding the goodwill allocated). This approach reflects whether the acquired goodwill has actually lost value, rather than forcing a fixed amortization schedule.

Goodwill is not amortized under GAAP. Instead, it is tested for impairment on a regular basis because its value can change due to events after the acquisition, and there isn’t a fixed useful life to allocate over.

Under GAAP, you perform an impairment review at least annually for goodwill, and more often if there are indicators that value may have declined. The test compares the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recorded. If the fair value is lower, you recognize an impairment equal to the excess of carrying amount over the fair value, limited to the amount of goodwill allocated to that unit.

For example, if the unit’s carrying amount (including goodwill) is 95 and its fair value is 85, you would recognize impairment of 10, reducing the goodwill accordingly (down to the extent of that impairment, not exceeding the goodwill allocated). This approach reflects whether the acquired goodwill has actually lost value, rather than forcing a fixed amortization schedule.