Chapter 2 — Subsequent Accounting for Goodwill (After Adoption of ASU 2017-04)

2.1 Overall Accounting for Goodwill

ASC 350-20

35-1 Goodwill shall not be amortized. Instead, goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit. (Paragraphs 350-20-35-33 through 35-46 provide guidance on determining reporting units.)

35-2 Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. However, an entity shall consider the related income tax effect from any tax deductible goodwill, if applicable, in accordance with paragraph 350-20-35-8B when measuring the goodwill impairment loss.

35-3 An entity may first assess qualitative factors, as described in paragraphs 350-20-35-3A through 35-3G, to determine whether it is necessary to perform the quantitative goodwill impairment test discussed in paragraphs 350-20-35-4 through 35-13. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).

This chapter addresses the accounting for goodwill after its initial recognition for all entities except private companies and NFPs that have elected the goodwill accounting alternatives. For those entities, see Chapter 3.

Connecting the Dots

In this chapter, it is assumed that an entity has adopted ASU 2017-04, which simplifies the accounting for goodwill by eliminating step 2 from the overall goodwill impairment test. Because that ASU is now effective for all entities, this publication does not address step 2 of the goodwill accounting model.

The ASC master glossary defines goodwill as “[a]n asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized.”1 Because goodwill is not a separately identifiable asset, it cannot be measured directly. It is therefore measured as a residual. Goodwill is initially recognized on an entity’s balance sheet in the following ways:

In a business combination in accordance with ASC 805, the excess of the consideration transferred over the acquisition-date values of assets acquired and liabilities assumed is recognized as goodwill. (See Chapter 5 of Deloitte’s Roadmap Business Combinations for more information about measuring goodwill in a business combination.)
Once an entity adopts ASU 2023-05, upon the formation of a joint venture in accordance with ASC 805-60, the excess of the fair value of the joint venture over its identifiable assets and liabilities is recognized as goodwill.
Upon adoption of fresh-start reporting in accordance with ASC 852, the excess reorganization value recognized by entities is reported as, and accounted for in the same manner as, goodwill.
In an acquisition by an NFP in accordance with ASC 958-805 in which the operations of the acquiree as part of the combined entity are not expected to be predominantly supported by contributions and returns on investments.

An acquiree may also recognize goodwill in its separate financial statements by applying pushdown accounting in accordance with ASC 805-50. Goodwill may also be recognized in the acquisition of an equity method investment, but such goodwill would be recognized as part of the investment and not as a separate balance sheet line item (see Section 2.12).

ASC 350-20-35-1 stipulates that goodwill is not amortized. Rather, ASC 350-20 requires that an entity assign all goodwill to one or more reporting units and test each reporting unit’s goodwill for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The sections below outline the method used to test goodwill for impairment.

2.1.1 Scope

ASC 350-20

Overall Guidance

15-1 This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 350-10-15, with specific transaction qualifications noted below.

Transactions

15-2 The guidance in this Subtopic applies to the following transactions and activities:

Goodwill that an entity recognizes in accordance with Subtopic 805-30 or Subtopic 958-805 after it has been initially recognized and measured
The costs of internally developing goodwill and other unidentifiable intangible assets with indeterminate lives
Subparagraph not used.
Amounts recognized as goodwill in applying the equity method of accounting and to the excess reorganization value recognized by entities that adopt fresh-start reporting in accordance with Topic 852.
Subparagraph not used.

Pending Content (Transition Guidance: ASC 805-60-65-1)

15-2 The guidance in this Subtopic applies to the following transactions and activities:

Goodwill that an entity recognizes in accordance with Subtopic 805-30, Subtopic 805-60, or Subtopic 958-805 after it has been initially recognized and measured
The costs of internally developing goodwill and other unidentifiable intangible assets with indeterminate lives
Subparagraph not used.
Amounts recognized as goodwill in applying the equity method of accounting and to the excess reorganization value recognized by entities that adopt fresh-start reporting in accordance with Topic 852.
Subparagraph not used.

15-2A Paragraph superseded by Accounting Standards Update No. 2010-07.

15-3 Although goodwill is an intangible asset, the term intangible asset is used in this Subtopic to refer to an intangible asset other than goodwill.

The general goodwill model in ASC 350-20 applies to all entities, except private companies and NFPs that have elected the goodwill accounting alternatives. This chapter addresses the general goodwill accounting model. Chapter 3 addresses the goodwill accounting alternatives.

In addition, ASC 350-20-15-3 clarifies that the term intangible asset refers to “an intangible asset other than goodwill.”

2.1.2 Internally Generated Goodwill

ASC 350-20

25-3 Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred.

ASC 350-20 defines goodwill as “[a]n asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized.” Thus, goodwill is not a specifically identifiable asset. Therefore, as discussed in ASC 350-20-25-3, internally generated goodwill is not recognized in an entity’s financial statements and must be expensed as incurred.

Footnotes

Upon adoption of ASU 2023-05, the definition of goodwill will become:

An asset representing the future economic benefits arising from other assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are not individually identified and separately recognized.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.