Which accounting practice relates to the treatment of goodwill after an acquisition?

The treatment of goodwill after an acquisition is defined by accounting standards, notably under the guidance provided by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS). Goodwill is defined as an intangible asset that arises when a company acquires another entity for more than the fair value of its identifiable net assets.

The correct treatment of goodwill is to classify it as having an indefinite life, which means it is not amortized like other intangible assets. Instead, companies are required to test goodwill for impairment at least annually, or more frequently if there are indications that it might be impaired. This involves assessing whether the current carrying amount of the goodwill exceeds its fair value. If an impairment is detected, the company must write down the value of goodwill on its balance sheet.

This accounting treatment reflects the idea that goodwill does not have a finite lifespan, as it is linked to factors such as reputation, customer relationships, and potential for future earnings, which can fluctuate and do not have a set expiration. This distinguishes goodwill from other types of intangible assets that typically do have defined useful lives and are systematically amortized over these periods.