Goodwill and intangible assets under ASC 350

How does ASC 350 treat goodwill and intangible assets?

What is goodwill under ASC 350?

Goodwill is the excess of the consideration transferred in a business combination, plus any noncontrolling interest and previously held interest, over the net identifiable assets acquired, measured under ASC 805. It represents future economic benefits that cannot be separately identified, such as an assembled workforce and expected synergies. Internally generated goodwill is never recognized.

What is a reporting unit?

An operating segment, or one level below an operating segment (a component), if the component is a business with discrete financial information that segment management regularly reviews. Goodwill is assigned to the reporting units expected to benefit from the combination, and the assignment is reviewed when the company reorganizes.

How are other intangible assets treated?

• Finite-lived intangibles, such as customer relationships, technology and patents, are amortized over their useful lives in the pattern in which their benefits are consumed, often straight-line, and tested for impairment under ASC 360 when events indicate.
• Indefinite-lived intangibles, such as some trademarks and broadcast licenses, are not amortized but tested for impairment at least annually, comparing fair value with carrying amount, with an optional qualitative screen.
• Internally developed intangibles are generally expensed, with exceptions for certain software costs.

An example

Why isn't goodwill amortized by public companies?

When the FASB stopped goodwill amortization in 2001, it concluded that goodwill does not decline in a predictable pattern and that investors found amortization charges unhelpful, routinely adding them back. Impairment testing was meant to give better information about when acquisitions lose value. Critics argue that impairments arrive too late, which is why the FASB later considered, but did not adopt, reintroducing amortization for public companies.

What happens to goodwill when a business is sold?

When a business within a reporting unit is disposed of, goodwill associated with it is included in its carrying amount in measuring the gain or loss, based on the relative fair values of the business sold and the part of the reporting unit retained.

How does goodwill interact with deferred taxes?

No deferred tax liability is recognized for goodwill that is not deductible for tax. Where goodwill is deductible, for example in an asset purchase, deferred taxes arise as tax amortization runs ahead of the book carrying amount, which is not amortized for public companies.

How is goodwill tested for impairment?

At least annually, and between annual tests when a triggering event occurs, such as a significant adverse change in the business, a loss of key customers, or a sustained decline in share price. A company may first perform a qualitative assessment; if it is more likely than not that the reporting unit's fair value is below its carrying amount, it performs the quantitative test. See the goodwill impairment test.

What about private companies?

Private companies may elect to amortize goodwill on a straight-line basis over 10 years, or less if more appropriate, and test it only when a triggering event occurs. See private company goodwill.

How does IFRS compare?

IFRS does not allow goodwill amortization for any company and tests goodwill against cash-generating units' recoverable amount. See IAS 36 vs US GAAP impairment.

This guide is general information. It is not tax or legal advice for your situation.