Summary of A Roadmap to Goodwill and Intangible Assets Accounting
- How to account for goodwill impairment?
- What is the journal entry for impaired goodwill?
- When goodwill is impaired, what type of account is debited?
- How to account for goodwill in accounting?
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AI Overview
Goodwill impairment is recorded
when the carrying value of a reporting unit exceeds its fair value, requiring a write-down of the asset. Public companies test for this at least annually or upon triggering events (e.g., market decline, poor performance). The loss is charged directly to the income statement.
Key Aspects of Accounting for Goodwill Impairment:
Assessment Trigger: Companies must perform an assessment (often a qualitative analysis first) when events indicate the fair value of a reporting unit has fallen below its carrying amount.
Quantitative Test: If it is “more likely than not” that impairment exists, the fair value of the reporting unit is compared to its carrying amount.
Recognition of Loss: If the carrying value exceeds the fair value, an impairment charge is recognized for the difference, not to exceed the total amount of goodwill.
Journal Entry: The impairment is recorded by debiting an “Impairment Loss” expense account and crediting the “Goodwill” asset account.
Private Company Option: Private companies (under U.S. GAAP) may elect to amortize goodwill on a straight-line basis over 10 years or less, which reduces the need for impairment testing.
Impairment Indicators (Triggering Events):
Significant decline in general economic conditions.
Increased competitive environment or new competitors.
Decrease in actual or projected revenue.
Continued decline in share price.
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In efforts to reduce the cost and complexity of goodwill impairment testing, the accounting models for goodwill have changed significantly from the model that the Financial Accounting Standards Board (FASB) first introduced in 2001. This Roadmap provides insights into—and interpretations of—ASC 350-20 and ASC 350-30 on the accounting guidance for goodwill and intangible assets.
ASC 350-20 addresses the accounting for goodwill after its initial recognition. While entities have been required to test goodwill for impairment for many years, the current goodwill accounting model has evolved significantly from the model that the FASB originally introduced in 2001. The FASB has issued numerous Accounting Standards Updates (ASUs) on this topic, which were generally intended to simplify or reduce the cost and complexity of performing goodwill impairment testing. As a result of those updates, ASC 350-20 now provides two accounting models used in the subsequent accounting for goodwill: the “general goodwill” model and the “goodwill accounting alternatives.” The table below outlines the significant differences between the two accounting models.
The subsequent accounting for goodwill continues to be a topic of interest. Despite removing a project on the topic from its technical agenda in 2022, in its January 2025 invitation to comment on its agenda consultation, the FASB yet again asked for stakeholders’ input on potential improvements to the current model. While it remains to be seen whether stakeholders will want additional changes, the topic is not likely to disappear from the Board’s radar completely.
Once an intangible asset is recognized, an entity must determine the asset’s estimated useful life. An intangible asset is either indefinite-lived or finite-lived on the basis of the intangible asset’s expected useful life to the entity. The useful life of an intangible asset is considered indefinite if it is not limited by any legal, regulatory, contractual, competitive, economic, or other factors. The term “indefinite” does not mean infinite or indeterminate; it only means that the asset’s life extends beyond the foreseeable horizon.
The subsequent accounting for an intangible asset varies considerably on the basis of whether the useful life of the asset to the entity is considered indefinite or finite. The table below highlights some key differences between finite-lived and indefinite-lived intangible assets.
In December 2024, the FASB issued an invitation to comment to seek stakeholder feedback on ways to improve the accounting and reporting associated with recognition of intangible assets, including the accounting for acquired and internally developed intangibles. However, there is no word yet on the results of the outreach, the impact it may have on the FASB’s future agenda, or whether the subsequent accounting for intangibles might also be affected.
Deloitte’s Roadmap Goodwill and intangible assets provides Deloitte’s insights and interpretations of the guidance in ASC 350-20.