Jasmeet Marwah: Goodwill’s initial measurement and impairment testing has been a hot discussion topic at the Financial Accounting Standards Board (FASB) and among financial reporting experts and various accounting circles for the last two decades. Such treatment is already allowed under private company accounting guidance. There is currently discussion of changing the accounting for goodwill for public companies to possibly return to amortisation over a finite period of time. Currently, goodwill is not amortised but, rather, remains on the balance sheet for an indefinite period and is tested at least annually for potential impairment. To minimise the impact on earnings, it was generally expected and accepted that most companies would choose an amortisation period of 40 years. It was, at one point, amortised over a period of time that was typically fairly long, ‘not to exceed 40 years’. Matt Clark: For at least as long as I have been a valuation practitioner – over 30 years – goodwill has never been written off as a true expense. The practice of capitalising goodwill is also consistent with current International Financial Reporting Standards (IFRS). Jason Muraco: Since 2001, goodwill recognised in an acquisition is capitalised on the balance sheet under US Generally Accepted Accounting Principles (GAAP).
The fair value is compared to the carrying value and if fair value is lower, then the difference is taken as a goodwill impairment. Although public companies still must identify and separate intangible assets and goodwill, the two-step process has been simplified to allow for an initial qualitative assessment of goodwill and then, if warranted, determining the fair value of the company. Today, private companies can elect to amortise goodwill and do not have to individually identify all assets in an acquisition. Companies were required to test for impairment at least on an annual basis using a two-step process. Intangible assets were amortised over an estimated life of the asset, while goodwill remained at a fixed amount and did not change unless impaired. Prior to 2014, all companies had to record intangibles and goodwill resulting from an acquisition on its financial statements. In other words, the definition of goodwill remains the same, but some of the accounting has been simplified. However, several significant variations have arisen. In my mind, the general landscape of goodwill valuations has not changed materially recently. Jeremy Krasner: In other words, goodwill is a simple residual amount – the difference between the purchase price and the fair value of all assets. For private companies that have elected the private company alternative, goodwill may include the value of certain assets, customer relationships and agreements not to compete, for example, that would be broken out separately otherwise, and is reduced by amortisation as well as any impairments.
Below, Matt Clark, Andrew Fargason, Jeremy Krasner, Jason Muraco, and Jasmeet Singh Marwah discuss trends across the goodwill valuation landscape, advice for businesses, the evolution of rules and regulations, and more.Ĭould you provide an overview of the main trends and developments across the goodwill valuation landscape in recent times? Once written-off as an expense, how is business goodwill defined today?Īndrew Fargason: Currently, for public companies, goodwill in a financial reporting setting is just the excess of the amount paid in a business combination over the values booked for all other assets net of liabilities, reduced by any impairments taken since acquisition.
Financier Worldwide recently sat down with several experts in Stout's Valuation Advisory group.
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