Sep 13, 2021

Goodwill Accounting: The $6 Trillion Brain Teaser

Thomas ReesBy Thomas Rees, CPA, CFE, CFA, CISA

The Financial Accounting Standard Board (FASB) decided several years ago to revisit the accounting model for goodwill and identifiable intangible assets. The accounting treatment of goodwill requires consideration of numerous theoretical issues that significantly impact the quality of financial reporting. Given that there is close to $6 trillion of goodwill recorded on company balance sheets, the decisions that the FASB eventually settle on will significantly impact many companies.

What Is Goodwill?

Goodwill is an intangible asset that represents the future economic benefits of a business acquisition. Goodwill arises when a company pays an amount that exceeds the fair value of the assets and liabilities acquired in a business combination. Even though goodwill may be generated through an entity’s ongoing business operations, under U.S. GAAP it is only recognized as a balance sheet asset in connection with a business acquisition.

While the initial recognition of goodwill is generally accepted, the subsequent (“Day 2”) accounting raises important and controversial conceptual issues. Considerations include whether goodwill has an indefinite life, whether it should be amortized, and over what period amortization should occur.

Current Accounting Treatment for Goodwill

Man holding holographic performance graphCompanies evaluate goodwill for impairment on an annual basis. If impairment is detected, companies write down the recorded value to its estimated fair value. This accounting approach stems from implementation of Statement No. 142, Goodwill and Other Intangible Assets, in 2001. Prior to SFAS 142, companies were required to amortize goodwill on a straight-line basis over a fixed period, up to 40 years. The FASB has subsequently amended the goodwill accounting rules to allow private companies to amortize goodwill and to ease the burden of performing impairment analysis.

Concerns with Current Practice

Numerous companies have raised concerns that the cost of conducting the impairment tests exceeds the benefits provided. In particular, the required accounting caused many companies headaches in 2020 as they had to reevaluate their impairment analyses due to the impact of COVID-19. Furthermore, goodwill valuations and corresponding impairment assessments are inherently subjective.

Several companies have recently taken large goodwill write-downs (including Kraft Heinz, General Electric, and AT&T). Theoretically, such write downs result in more accurate valuation of a company. However, impairment charges relate to an entity’s previous management decisions, not its current operations, and therefore distort reported net income.

Status of FASB Project

The FASB’s invitation to comment (issued in July 2019) received more than 100 responses. As FASB proposals go, this is a lot. (A summary of these comment letters is available on the FASB website.)

At a recent meeting, the FASB tentatively decided to pursue an approach that would require entities to amortize goodwill on a 10-year straight-line basis unless another amortization period (subject to a cap) could be justified based on the specifics of the acquisition. The FASB is still considering whether certain identifiable intangibles should be subsumed into goodwill, whether certain intangibles should be recognized separately from goodwill, and what factors may be used to estimate the useful life of goodwill.


The implications of the proposed revisions to goodwill accounting are significant, but will not be fully understood until implemented. Some of the potential impacts, based on the FASB’s tentative decisions, include the following:

  • Amortization of goodwill over a fixed period will result in annual expense charges that may significantly impact reported earnings. Arguably, the value of goodwill varies by acquisition, so a mandated amortization period is not only arbitrary, but also may not accurately reflect change in the asset’s value.
  • Because amortization is a noncash expense, reported earnings will be less reflective of company operations. In response, many companies may report a non-GAAP metric reflecting earnings exclusive of such amortization. The Securities and Exchange Commission has raised concerns about non-GAAP disclosures, and such disclosures will increase if the FASB’s proposal is adopted.
  • The proposed goodwill treatment will significantly impact key ratios used by financial analysts. While the reduction in a subjectively valued asset (goodwill) may improve the quality of the balance sheet, the amortization expense will result in lower profitability ratios (return on equity and return on assets) and potentially lower leverage ratios.
  • Given the significance of goodwill accounting to global entities (who have the most goodwill), it is important that U.S. GAAP and International Financial Reporting Standards be consistent. The International Accounting Standards Board has a goodwill project on its agenda, but at this point it is not clear what direction the IASB is headed.

Whatever approach FASB chooses, the controversy around the accounting for goodwill is unlikely to go away any time soon.


FASB’s goodwill accounting project is still in its early stages, as an actual exposure draft has not been issued yet. Accordingly, interested parties have plenty of time to consider the implications and respond to the exposure draft before any new accounting requirements become effective.

Thomas Rees, CPA, CFE, CFA, CISA, is a professor of practice – accounting – at Lehigh University in Bethlehem, Pa., and senior managing director for FTI Consulting in Wayne, Pa. He can be reached at tgr218@lehigh.edu.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.