Financial Accounting Concepts

Treatment of Goodwill: IFRS v. US GAAP

When it comes to accounting principles, the treatment of goodwill can vary significantly between International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP).

In this blog post, we will explore the differences in the treatment of Goodwill under IFRS and GAAP and the implications for financial reporting.

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Goodwill Accounting

Due to the growing importance of intangible assets, there has also been a significant change in the standards associated with the accounting treatment of goodwill or goodwill accounting.

International Accounting Standard Board issued the International Financial Reporting Standard (IFRS) 3- Business and Combination in 2004. This new standard provides significant changes for the accounting treatment of intangible assets, goodwill and business combinations.

According to new standards,  firms must not amortise the goodwill, but it must be tested for annual impairment. The new accounting rule moved the head of American General Accepted Accounting Principal (US GAAP), which introduced such an approach a few years earlier for the accounting treatment of Goodwill.

On July 20, 2001, the Financial Accounting Standard Board (FASB) issued standard statements such as; Standard -141 Business Combination and 142- Goodwill and Other Intangible. Under the US GAAP, goodwill is not amortised but must be tested for impairment. A firm does not consider goodwill as a separate asset, so it is evaluated for impairment as a part of the cash-generating unit under IFRS or reporting unit in US GAAP.

U.S. GAAP Treatment of Goodwill Impairment

U.S. GAAP (Statement of Financial Standard Accounting Board -142 business Combinations and 142- Goodwill and Other Intangible assets) laid down the rules for the accounting treatment of Goodwill in the books of account.

Under U.S. GAAP, the value of goodwill is recorded as the excess of the cost of an acquisition price over the fair value of acquired net assets. It will be recorded only when the carrying amount of goodwill exceeds its implied fair value.

Before the new accounting standards, companies generally recorded the total amount of goodwill in the books. They did not assign the value of goodwill to the individual reporting unit of business.

A reporting unit is defined in the Statement of Financial Accounting Standard 142.30 as an operating unit or its component. Companies assign the value of goodwill to report units by comparing the estimated value of the operating unit with the fair value of the reporting unit’s identifiable net assets. Two-step impairment should be followed to identify potential goodwill impairment and measure the amount of impairment loss to be recognised if any.

Step 1:-Test for Impairment Goodwill

The companies should follow the first step to identify the reporting unit’s fair value that has goodwill.

Compare the fair value of the reporting unit with its carrying amount.

If the carrying value of the reporting units exceeds its fair value (carrying value > fair value), continue to the next step; otherwise, stop.

Step 2:- Measures the Amount of Goodwill Impairment Loss

To calculate the impairment loss of goodwill, the companies should follow the accounting standards rules.

(a) Allocate the fair value of the reporting unit step 1 to identifiable assets and liabilities of the reporting unit based on their current fair value;

(b) Allocate any excess fair value to goodwill;

(c) compare the amount allocated to goodwill In step 2(b) with the balance sheet carrying the value of goodwill

(d) An organisation can recognise an impairment loss on goodwill by reducing the carrying value to its fair value computed in step 2b.

Treatment of Goodwill as Per IFRS

Initial Recognition

  • Goodwill arises when a company acquires another company and pays more than the fair value of its identifiable assets and liabilities.
  • This excess amount represents the intangible benefits of the acquisition, such as a strong brand name, loyal customer base, or skilled workforce.
  • Under IFRS 3, goodwill is recorded at its fair value, which is the difference between the acquisition cost and the fair value of the identifiable net assets acquired 

Subsequent Measurement

  • IFRS takes an impairment-only approach for goodwill. This means goodwill is not amortized over time.
  • Instead, companies must test goodwill for impairment annually or whenever there’s an indication that it might be impaired [IFRS 3.56].
  • An impairment test involves comparing the recoverable amount of the cash-generating unit (CGU) to its carrying amount. The CGU is the smallest identifiable group of assets that generates cash inflows independent of other assets [IFRS 36.6].
  • If the recoverable amount is less than the carrying amount, an impairment loss is recognized in the income statement [IFRS 3.59].


Both IFRS and US GAAP (Generally Accepted Accounting Principles) require companies to assess goodwill for impairment, but their approaches differ. IFRS focuses on the current value of the cash-generating unit (CGU) where goodwill resides, recognizing an impairment loss if the value falls. Conversely, regardless of current value fluctuations, US GAAP amortizes goodwill over time. This can lead to a smoother expense pattern under US GAAP, but IFRS may provide a more timely picture of a company’s intangible asset health.

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