Can You Depreciate Goodwill Under GAAP Book Accounting?

Under GAAP book accounting, goodwill is a tricky asset to depreciate. According to the Financial Accounting Standards Board (FASB), goodwill is not subject to amortization, but rather impairment testing.

In other words, goodwill is not depreciated like other assets, such as equipment or property.

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Goodwill represents the excess of purchase price over the fair market value of a company's net assets. This excess value can arise from various factors, such as a company's brand being more valuable when combined with its distribution system.

There are two main reasons why an acquirer would pay more than the fair market value of a company's assets: the value of a business can be greater than the sum of its individual assets, and synergies (cost savings) can be achieved through strategic deals.

Under GAAP accounting, goodwill is not amortized but rather tested annually for impairment, regardless of whether the acquisition is an asset/338 or stock sale.

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Goodwill is treated one way under tax accounting and another under GAAP accounting.

The basic calculation of goodwill is explained in our M&A accounting primer.

Under tax accounting, goodwill is amortized over 15 years.

GAAP accounting, on the other hand, requires goodwill to be tested for impairment annually.

This difference can be a challenge for companies to navigate.

It's essential to understand the specific accounting requirements for goodwill to ensure compliance.

Under GAAP book accounting, goodwill is not amortized but rather tested annually for impairment, regardless of whether the acquisition is an asset/338 or stock sale.

Goodwill under GAAP accounting is not amortized, but it's tested annually for impairment.

A key exception to this rule is that goodwill amortization is permissible for private companies under GAAP.

Private companies can elect to amortize goodwill, which reduces the costliness of annual impairment testing.

This accommodation is intended to help private companies that lack the internal accounting resources needed to perform the tests.

However, not all private companies take this election, as it would require them to restate all of their financials if they ever went public.

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Amortizing goodwill was once a straightforward process, but it's undergone significant changes over the years. Prior to 2001, goodwill was amortized over a period not to exceed 40 years.

The Financial Accounting Standards Board issued a statement in June 2001 that ended the automatic amortization of goodwill. This change had a significant impact on how companies account for goodwill.

Today, goodwill is not automatically amortized, but rather reviewed annually for impairment. This means that companies must assess whether the value of goodwill has decreased and record an impairment loss if necessary.

Private companies, however, are allowed to opt for a 10-year amortization period, which can simplify the process of testing for impairment.

Goodwill is tax-deductible and amortizable over 15 years in an asset sale/338 election, along with other intangible assets under IRC section 197.

Prior to 2001, goodwill was amortized over a period not to exceed 40 years, but this changed with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 142 in June 2001.

Today, goodwill is reviewed annually for impairment, and private companies can opt to amortize it over a 10-year period to minimize the cost and complexity involved with testing for impairment.

In an asset sale/338 election, goodwill is tax-deductible and amortizable, making it more attractive to acquirers.

Here's a comparison of goodwill amortization periods:

Intangibles, like goodwill, can be difficult to value, but they're often a key part of a business's overall worth.

When an acquirer pays more than the fair market value of a company's assets, it's often because of the value of intangibles like a strong brand or distribution system.

Intangibles can be synergistic, meaning they're more valuable when combined with other assets.

For example, Pepsi's brand is worth more when paired with its distribution system.

Intangibles need to be amortized over their useful life, just like tangible assets.

The useful life of intangibles can vary, but it's typically between 5 to 20 years.

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