Question

Which of the following is not true about goodwill?

a) Goodwill is an intangible asset.
b) It arises when one company acquires another.
c) Goodwill is amortized over a specific period.
d) Impairment testing is conducted regularly for goodwill.

Answer 1

Goodwill is not amortized over a specific period, which is the statement that is not true about goodwill. Goodwill should be subjected to annual impairment testing but is no longer systematically amortized under current accounting standards. The correct option is C.

Step-by-step explanation:

The statement that is not true about goodwill is that 'Goodwill is amortized over a specific period.' Historically, goodwill was amortized over a period not exceeding 40 years, but accounting standards have evolved.

According to the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) in the United States, goodwill is no longer amortized. Instead, it remains on the balance sheet at its purchased value and must undergo an impairment test annually to determine if its value on the books needs to be adjusted downwards.

Here are the truths about goodwill:

• Goodwill is indeed an intangible asset.
• It typically arises when one company acquires another and the purchase price is higher than the fair value of the identifiable net assets.
• Regular impairment testing is conducted for goodwill to ensure its recorded value is not greater than its fair value.