FASB Rules and Private Company Options

Goodwill is an intangible asset that represents the premium a company pays when acquiring another business. This often reflects in brand value, customer relationships, or reputation.

In 2001, the Financial Accounting Standards Board (FASB) prohibited amortizing goodwill under Statement 142, instead requiring annual impairment tests to assess its value. In 2014, the rules changed to give private companies the option to amortize goodwill, providing more flexibility in accounting. Statement 142 initially shifted focus to impairment testing, but private companies can now choose the method that best suits their financial reporting, affecting how they value assets and report earnings.

Learn more about the FASB’s goodwill amortization rules, key changes over time, and when private companies can amortize goodwill to simplify your accounting practices.

Updates in Goodwill Accounting Standards

In accounting, goodwill is accrued when an entity pays more for an asset than its fair value, based on the company’s brand, client base, or other factors. Corporations use the purchase method of accounting, which does not allow for automatic amortization of goodwill. Goodwill is carried as an asset and evaluated for impairment at least once a year.

However, in 2014, this policy was partially rolled back with the FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350). The FASB re-allowed private companies to elect to amortize goodwill on a straight-line basis over 10 years. However, the election is not required. If desired, the option to amortize enables private companies to forgo the costly annual impairment tests that are required of public companies.

Goodwill Calculation and Impairment Tests

Until 2001, goodwill could be amortized for a period of up to 40 years. Many companies used the 40-year maximum to neutralize the periodic earnings effect and report supplementary cash earnings that they then added to net income. The FASB changed this in June 2001 with the issuance of Statement 142, which prohibits this.

The first step of the impairment test required under the new standard must be performed within the first half of the company’s fiscal year. If an impairment is found, the company reduces the goodwill carrying value and recognizes an impairment loss. Any material impairments found are listed as line items above “income from continuing operations.”

Because the annual valuation of goodwill is particularly expensive and time-consuming for private companies, the FASB created alternative goodwill accounting provisions for them. FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill allows these companies to use straight-line amortization of goodwill for up to 10 years, or less if the company is able to demonstrate a useful alternative lifespan. Private companies only needed to conduct impairment tests when a triggering event indicated that the company’s fair value is less than its carrying amount, rather than having to do so every fiscal year.

The FASB updated the goodwill standard again in 2021. It allows private companies to evaluate a goodwill triggering event only at the reporting date, rather than immediately when it occurs.

The Bottom Line

Goodwill is an intangible asset that reflects brand reputation, customer relationships, and other proprietary properties. In 2001, the FASB stopped allowing the amortization of goodwill, requiring public companies to perform annual impairment tests, which can be costly.

In 2014, the FASB said private companies can amortize goodwill over 10 years and only needed to test for impairment when certain events occur. But this changed in 2021, when private companies were allowed to test for impairment at the reporting date.

Because goodwill is tied to the business, it can’t be sold or transferred separately from the company.