Accounting Treatment of Goodwill
The Financial Accounting Standards Board (FASB) Statement #142, Goodwill and Other Intangible Assets, addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in the acquiring company’s financial statements subsequent to their initial recognition. Under FAS 142, goodwill and certain intangible assets will no longer be amortized over a specified, hypothetical, useful life. In addition, goodwill and other intangible assets will no longer be amortized using straight line amortization meaning the amount of amortization will probably not be the same each year.
Fundamentally, FAS 142 rejects the idea that all intangible assets are necessarily “wasting” assets. Under FAS 142, goodwill and intangible assets that have indefinite useful lives will not be amortized over a theoretical fixed lifetime. Instead, they will be tested annually for impairment û with the exception of intangible assets that are identified as having finite useful lives that will continue to be amortized, but without the constraint of an arbitrary maximum useful life of forty years. Under FAS 142, goodwill and other intangibles will still be recognized as assets. Impairment testing will be done using a two-step process. The first step involves reviewing the
assets in question for impairment.
Impairment means a decrease in value. The second step involves a determination of the dollar amount of any such impairment. Under FAS 142, the fair value of an asset is compared to its book value including goodwill. The measurement of fair value is the amount at which an asset could be sold in an “arm length” transaction between willing and unrelated parties. If the book value is below the fair value assessment, there will be no impairment loss. If the fair value is below the book value, the asset is impaired and the company must write down the asset.
The impact of this rule on financial statements will…