Goodwill amortisation is the systematic and gradual reduction of the value of a company’s goodwill asset. A company may calculate the reduction by recording amortisation charge regularly. Based on the accounting standards, companies may choose to conduct the amortisation over ten years on a straight-line basis (Also see Straight-line Depreciation and Accelerated Depreciation). If a company does not want to do so, the amortisation period can be shorter than ten years if it can show that using a different useful life is more suitable.
An important point to mention when using amortisation is the company should perform the impairment testing too. However, they should only do so if there is a triggering event which illustrates that the company’s carrying amount (Also see How to Calculate the Carrying Value of Assets?) has exceeded its fair value. If you are not sure how you should conduct the impairment testing, do not hesitate to seek help from an accounting firm in Johor Bahru.
Besides, the business owners may choose to have the impairment testing (Also see What is Impairment Testing for Goodwill?) at the organisational level, rather than having it for every reporting unit. As the amortisation that occurs continually will keep reducing the company’s carrying amount as time passes, the possibility of the impairment test will decrease over time. As the impairment testing is at the organisational level, less work will involve in the residual impairment testing.
If a company choose to amortise goodwill, it needs to continue doing this for all goodwill it has as well as for new goodwill which is related to the transactions that will happen in future, if there is any. This indicates that a company cannot implement amortisation to its goodwill which arises from particular acquisition selectively.
There are some reporting requirements which are related to the amortisation of goodwill. The company should present the amount of goodwill excluding any impairment charges and accumulated amortisation on its balance sheet. This has no difference from what we will do when we are presenting the fixed assets. On the other hand, the company should show goodwill amortisation within continuing operations, except if the company is involved in a discontinued operation. If this happens, the company should present it with the outcome of a discontinued operation.