Valuation of goodwill often comes about in the context of business selling price allocation. In the past, business goodwill was one of the intangible assets recorded on the books when the company changed hands. This acquired asset was then amortized over time.
The new rules of handling goodwill have been published in 2001 by the Financial Accounting Standards Board (FASB). The rules state that goodwill is no longer amortized. Instead, goodwill is assumed to have indefinite life.
Goodwill impairment – is your business value holding up?
Businesses now conduct the so-called goodwill impairment test, at least yearly. You determine the overall value of the business and compare it to the carrying amounts of business assets. If the business value falls below the sum total of all the business assets, the value of business goodwill is reduced by an appropriate amount.
This means that business goodwill continues to be shown on your company’s books as long as the company’s value is high enough. If the business value drops, you can write off all or part of the business goodwill accordingly.
The write-down is against the company’s earnings for the year and reflects the drop in the company’s value.
Goodwill impairment or amortization – which one is best?
Whether this accounting strategy is an improvement on goodwill amortization is debatable. You now avoid the reduction in business earnings due to the amortization charge. On the other hand, goodwill write-downs are not exactly good news as they clearly state that the company’s value is going down.
Six of one, half a dozen of the other? You decide.