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Accounting for GOODWILL

“Goodwill” is an intangible asset that can appear on a company’s balance sheet as the result of acquiring another firm. When the amount paid for a firm is more than the fair value of the firm’s net assets, the difference is typically recorded as goodwill.

The story doesn’t end after goodwill is recorded. U.S. generally accepted accounting principles (GAAP) require companies to reduce the carrying value of goodwill in subsequent periods if testing shows the goodwill is “impaired.” The testing, which must be done at least annually or more frequently if certain conditions exist, can be complex and costly.

The Financial Accounting Standards Board (FASB) recently introduced a simpler accounting alternative for private companies. A private company that elects the alternative generally will amortize goodwill on a straight-line basis over 10 years (or less in certain instances) and perform the goodwill test for impairment only when a triggering event occurs that indicates the fair value of the entity (or reporting unit) may be below its carrying amount.

The new standard is effective for annual periods beginning after December 15, 2014, with early adoption allowed.