How to Account for Goodwill

Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the identifiable assets acquired in a business combination. Accounting for goodwill requires a specific set of rules and procedures that depend on the accounting standards used by the company. Here are the general steps to account for goodwill:

1. Identify the goodwill: Goodwill is recognized when a business is acquired for a price that exceeds the fair value of the identifiable assets and liabilities acquired. The excess amount is recorded as goodwill.

2. Determine the useful life of goodwill: Goodwill is considered to have an indefinite life, which means it is not subject to amortization. However, it should be tested annually for impairment.

3. Test for impairment: Goodwill is tested for impairment annually or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. The impairment test compares the carrying amount of the reporting unit to its fair value. If the carrying amount exceeds the fair value, an impairment loss is recognized.

4. Record impairment loss: If the goodwill is impaired, an impairment loss is recognized. The loss is equal to the excess of the carrying amount of goodwill over its fair value. The impairment loss is recorded as a separate line item in the income statement.

5. Disclose information about goodwill: Companies are required to disclose information about their goodwill, including the carrying amount, any impairment losses recognized, and the methods and assumptions used in estimating the fair value.

In summary, accounting for goodwill requires the identification of goodwill, the determination of its useful life, the testing of its impairment, the recognition of any impairment losses, and the disclosure of information about goodwill in the financial statements.