3.3 Goodwill Amortization Alternative
ASC 350-20
Accounting Alternative for Amortizing Goodwill
35-62
The following guidance for goodwill applies to entities
within the scope of paragraph 350-20-15-4 that elect the
accounting alternative for amortizing goodwill.
35-63
Goodwill relating to each business combination, acquisition
by a not-for-profit entity, or reorganization event
resulting in fresh-start reporting (amortizable unit of
goodwill) shall be amortized on a straight-line basis over
10 years, or less than 10 years if the entity demonstrates
that another useful life is more appropriate.
Pending Content (Transition Guidance: ASC
805-60-65-1)
35-63 Goodwill relating to each business
combination, acquisition by a not-for-profit
entity, joint venture formation, or reorganization
event resulting in fresh-start reporting
(amortizable unit of goodwill) shall be amortized
on a straight-line basis over 10 years, or less
than 10 years if the entity demonstrates that
another useful life is more appropriate.
ASC 350-20-35-63 clarifies that each amortizable unit of goodwill “shall be amortized
on a straight-line basis over 10 years, or less than 10 years if the entity
demonstrates that another useful life is more appropriate.” While not specifically
mentioned above, this guidance also applies to goodwill that arose from the
application of pushdown accounting in the acquiree’s separate financial statements
under ASC 805-50 as well as the portion of the difference between the cost of an
equity method investment and the amount of underlying equity in net assets of an
equity method investee that is recognized as goodwill.
Entities that elect to amortize goodwill will need to separately
track (1) the goodwill existing as of the beginning of the period of adoption and
(2) each addition to the goodwill balance. The guidance in ASC 350-20 refers to each
unit of account as an “amortizable unit of goodwill.” In addition, if the entity
elects to test goodwill at the reporting unit level, the goodwill existing as of the
beginning of the period of adoption, as well as each addition to the goodwill
balance, will need to be tracked separately by reporting unit.
The entity must assign each amortizable unit of goodwill a useful life of 10 years or
less and amortize it over its assigned useful life. An entity amortizing goodwill
over 10 years does not need to justify its selection of a 10-year amortization
period. Therefore, entities commonly default to a useful life of 10 years since
there can be inherent difficulties with estimating the period over which goodwill
provides benefits to the entity. If an entity selects a useful life of less than 10
years, it should be able to demonstrate how it determined that such a useful life is
appropriate. Therefore, it is possible that different amortizable units of goodwill
could be assigned different useful lives depending on the circumstances. However, in
no case can an entity select an amortization period that exceeds 10 years.
The example below illustrates how an entity would amortize each amortizable unit of
goodwill.
Example 3-1
Company A, a private company that has adopted the goodwill
amortization alternative, has elected to (1) test goodwill
for impairment at the entity level and (2) amortize each
unit of goodwill over the default useful life of 10 years.
Upon adopting the alternative, A had $8,000 of goodwill,
which has two years of remaining useful life as of January
1, 20X4. In addition, A acquired Company B seven years ago
and Company C six years ago in transactions accounted for as
business combinations. (For simplicity, assume that the
acquisitions occurred on January 1.) In the absence of
another acquisition, disposition, or goodwill impairment
loss, A will recognize the following amounts of goodwill
amortization expense over the next five years:
See Section
5.5.2 for goodwill amortization presentation requirements. Also see
Section 11.3.2.3 of
Deloitte’s Roadmap Income
Taxes for more information regarding the tax effects of
amortizing goodwill for book purposes.
3.3.1 Revising a Useful-Life Determination
ASC 350-20
35-64 An entity may revise
the remaining useful life of goodwill upon the
occurrence of events and changes in circumstances that
warrant a revision to the remaining period of
amortization. However, the cumulative amortization
period for any amortizable unit of goodwill cannot
exceed 10 years. If the estimate of the remaining useful
life of goodwill is revised, the remaining carrying
amount of goodwill shall be amortized prospectively on a
straight-line basis over that revised remaining useful
life.
Under ASC 350-20-35-64, an entity may revise the remaining
useful life of each amortizable unit of goodwill if it can demonstrate that a
revised remaining useful life is more appropriate on the basis of a change in
facts or circumstances. However, the guidance also indicates that the
“cumulative amortization period of any amortizable unit of goodwill cannot
exceed 10 years.” Therefore, if an entity assigns a 10-year useful life to an
amortizable unit of goodwill and there is a change in facts or circumstances,
the entity may shorten the useful life. Alternatively, if an entity initially
assigns the unit of goodwill a life of less than 10 years, and there is a change
in facts or circumstances indicating that its useful life is 10 years or longer,
the entity can revise the useful life of that goodwill up to 10 years. After a
change in useful life, the carrying amount of each amortizable unit of goodwill
should be amortized prospectively on a straight-line basis.