Final answer:
Goodwill is an intangible asset that appears on a balance sheet as a separate item with an indefinite lifespan and is not subject to depreciation. It represents the extra value paid for an acquired business over its net identifiable assets' fair value and is tested annually for impairment.
Step-by-step explanation:
The asset that is listed as a separate item on the balance sheet and has an unlimited life without depreciation is goodwill. Goodwill is an intangible asset that arises when a company acquires another business for more than the fair value of its net identifiable assets. It is the premium paid over the fair market value of the acquired company's assets, representing future economic benefits like brand reputation, customer relationships, and intellectual property. Unlike tangible assets such as equipment and buildings that are depreciated over time, goodwill is considered to have an indefinite lifespan, and is therefore tested annually for impairment, rather than being depreciated.
Goodwill's recognition on the balance sheet as a distinct item reflects its potential to generate value for the company indefinitely. Companies may allocate part of their earnings to goodwill to reflect enhancements in their reputation or market position, providing a cushion for the business's earning power. But because goodwill has an unlimited life, accounting standards require that companies test goodwill for impairment regularly, ensuring that it reflects the current fair value and the future economic benefits it may provide to the company.