How are goodwill and intangible assets recognized, amortized, and tested for impairment?
I'm studying long-lived assets and the intangibles section is confusing. When is goodwill created? Why don't you amortize it? And how does impairment testing work differently for goodwill vs. other intangibles?
Intangible assets and goodwill have unique accounting rules that differ significantly from tangible assets. Here is the breakdown.
Types of Intangible Assets
| Type | Examples | Amortization | Impairment |
|---|---|---|---|
| Finite-life | Patents, copyrights, customer lists | Yes (over useful life) | Test if indicator exists |
| Indefinite-life | Trademarks, broadcast licenses | No | Test annually |
| Goodwill | Acquisition premium | No | Test annually |
When Is Goodwill Created?
Goodwill arises ONLY from business acquisitions. It cannot be internally generated and recognized.
Goodwill = Purchase Price - Fair Value of Net Identifiable Assets
Example: Apex Holdings acquires Beacon Analytics for $15 million. The fair value of Beacon's identifiable net assets is $11 million.
Goodwill = $15M - $11M = $4 million
Internally Generated Intangibles
Under IFRS, R&D is split:
- Research costs: Expensed as incurred
- Development costs: Capitalized if six criteria are met (technical feasibility, intention to complete, ability to use/sell, probable future benefits, resources available, reliable measurement)
Under US GAAP, all R&D is expensed (with a narrow exception for software development costs after technological feasibility).
Goodwill Impairment Testing
Critical Differences:
- US GAAP uses reporting units; IFRS uses cash-generating units (CGUs)
- Neither standard allows goodwill impairment reversal
- Finite-life intangible impairment can be reversed under IFRS, but not under US GAAP
Exam Tip: The CFA exam tests whether goodwill is amortized (no), whether impairment can be reversed (no for goodwill, yes for other intangibles under IFRS), and the calculation of goodwill from an acquisition scenario.
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