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9.1 Overview: accounting for goodwill post acquisition
Publication date: 31 May 2024
us Business combinations guide
This chapter discusses the subsequent accounting for goodwill post acquisition, including how to test goodwill for impairment.
Related content
- Guidance on the initial recognition and measurement of goodwill is included in BCG 2.6.
- Presentation and disclosure guidance related to goodwill is included in FSP 8.9. Additionally, for private companies, see FSP 8.10.2 and FSP 8.10.3.
Generally, the acquirer in a business combination is willing to pay more for a business than the sum of the fair values of the individual assets and liabilities because of other inherent value associated with an assembled business. In addition, synergies and other benefits that are expected from combining the activities of the acquirer and acquiree are often drivers for paying an amount greater than the fair value of the underlying assets and liabilities. The resulting excess of the aggregate of (1) the consideration transferred, as measured in accordance with ASC 805-30-30-7, which generally requires the use of acquisition-date fair value; (2) the fair value of any noncontrolling interest in the acquiree; and (3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, as measured in accordance with ASC 805, is recognized as goodwill. This chapter addresses the accounting for goodwill after an acquisition.
Under ASC 350-20, goodwill is not amortized. Rather, an entity’s goodwill is subject to periodic impairment testing. ASC 350-20 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis 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.
An entity is permitted to first assess qualitative factors to determine whether a quantitative goodwill impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, including goodwill. Otherwise, no further impairment testing is required. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test. This would not preclude the entity from performing the qualitative assessment in any subsequent period.
When an entity bypasses the qualitative assessment or determines based on the qualitative assessment that further testing is necessary, a quantitative goodwill impairment test is performed to measure an impairment loss, if any. To perform the quantitative goodwill impairment test, an entity must:
- Identify its reporting units
- Assign assets and liabilities to its reporting units
- Assign all goodwill to one or more of its reporting units
- Determine the fair value of those reporting units to which goodwill has been assigned
Under ASC 350-20, a goodwill impairment loss is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. Once a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill will be its new accounting basis. In accordance with ASC 350-20-35-13, a previously recognized goodwill impairment loss cannot be reversed.
The above summarizes the process for a public entity testing goodwill for impairment. However, a private company/not-for-profit (NFP) entity may make an accounting policy election for certain accounting alternatives related to goodwill. See BCG 9.11 for discussion of the goodwill accounting alternatives for private companies/NFP entities.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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