The Impact of Amortized Goodwill to your Borrowers

written by Kami Bailey A

s you review the financial statements of small business borrowers, you may now see goodwill amortized on the statements of borrowers that have acquired other businesses. This is due to a significant accounting change that occurred a few years ago. FASB Accounting Standards Update (ASU) 2014-02 permitted non-public business entities to amortize goodwill after an acquisition instead of having to test goodwill for impairment annually.

“Goodwill” is an intangible asset that arises when one business buys another for more than the net book value of its assets. It is defined as the excess of the amount of money paid to purchase the business over the business’ assets minus liabilities. Patents and proprietary technology, an experienced and stable workforce and customer base, strong customer relationships, and a valuable brand name in the marketplace are examples of goodwill. Privately held businesses can now amortize goodwill on a straight-line basis for 10 years or fewer in certain circumstances.

Testing for goodwill impairment now is only required if a triggering event occurs that suggests a company’s carrying value might be more than its fair value. The aggregate amount of goodwill, less accumulated impairment and amortization, will appear as a separate line item in a borrower’s statement of financial position. The amortization, along with the aggregate amount of goodwill impairment, will generally appear in line items on the income statement within continuing operations. Goodwill can be amortized regardless of whether a private business has audited, reviewed, or compiled financial statements. From a practical standpoint, though, it’s most likely to appear on audited and reviewed statements.

Give us a call if you have more questions about goodwill amortization 417-881-0145.