Goodwill Amortization vs Impairment: Key Differences
Goodwill Amortization vs Impairment: Key Differences
- Public companies under US GAAP cannot amortise goodwill — they must test it for impairment annually (ASC 350).
- Private companies under US GAAP may elect to amortise goodwill over up to 10 years (ASC 350-20).
- Under IFRS (IFRS 3 / IAS 36), goodwill is not amortised — impairment-only approach applies globally.
- Amortisation spreads the cost predictably; impairment is event-driven and can cause sudden large charges.
- Alpha Corp example: $500K goodwill amortised over 10 years = $50K/year vs $300K impairment in year one.
Goodwill amortization and goodwill impairment are two distinct accounting approaches for reducing the carrying value of goodwill after a business acquisition. Amortization spreads the cost systematically over a fixed period; impairment is a triggered write-down when the reporting unit's fair value drops below its carrying amount. Which method applies depends on your accounting framework and entity type.
This article compares the two approaches across US GAAP and IFRS, explains the journal entries for each, and helps you understand which method your company should follow — and why the debate between regulators continues.
What Is Goodwill Amortization?
Goodwill amortization is the systematic allocation of the goodwill balance to expense over a defined useful life — similar to how depreciation works for tangible assets. A company using amortization recognises a fixed expense each period without performing a valuation of the reporting unit.
What Is Goodwill Impairment?
Goodwill impairment is an event-driven write-down that occurs when the fair value of the reporting unit (the business containing the goodwill) falls below its carrying amount. No impairment is recorded if fair value stays above carrying amount — regardless of how long the acquisition has been on the books. For a full treatment, see the Goodwill Impairment Complete Guide.
Key Differences at a Glance
| Factor | Amortization | Impairment |
|---|---|---|
| Trigger | Passage of time (systematic) | Fair value decline (event-driven) |
| Frequency | Each reporting period | Annual, or upon triggering event |
| Amount | Fixed, predictable | Variable — can be zero or large |
| Requires Valuation? | No | Yes (quantitative test) |
| US GAAP — Public | Not permitted | Required (ASC 350) |
| US GAAP — Private | Permitted (up to 10 years) | Still required (if impairment indicators exist) |
| IFRS | Not permitted | Required annually (IAS 36) |
| Reversal? | N/A (systematic) | Not permitted |
US GAAP — Public Companies: Impairment-Only
Since SFAS 142 (now codified as ASC 350), US public companies cannot amortise goodwill. Instead, they must test goodwill for impairment at least annually, using a two-step process:
- Step 0 (Qualitative): Is impairment more likely than not?
- Step 1 (Quantitative): Compare fair value to carrying amount; record any shortfall as an impairment loss.
For the detailed testing process, see Goodwill Impairment Test (ASC 350): Step-by-Step Process.
US GAAP — Private Companies: The Amortization Election
In 2014, FASB issued ASU 2014-02, allowing private companies (and not-for-profit entities in 2019) to elect to amortise goodwill. Key provisions:
- Maximum useful life: 10 years (or shorter if a shorter life is more appropriate)
- Method: straight-line unless another systematic method is more appropriate
- Impairment testing: still required, but only when a triggering event occurs (no mandatory annual test)
- Impairment test: performed at the entity level rather than the reporting unit level (simpler)
- Reversal: impairment losses still cannot be reversed
IFRS Treatment: Impairment-Only (No Amortization)
IFRS 3 (Business Combinations) and IAS 36 (Impairment of Assets) govern goodwill under IFRS:
- Goodwill is not amortised under IFRS — the amortization-only and amortization-plus-impairment options are not available.
- Annual impairment testing is required at the Cash Generating Unit (CGU) level (the IFRS equivalent of a reporting unit).
- IAS 36 uses a one-step impairment model: the carrying amount of the CGU is compared to its recoverable amount (the higher of fair value less costs to sell and value in use).
- Impairment losses under IFRS cannot be reversed — consistent with US GAAP.
For related IFRS asset accounting, see the IAS 40 Investment Property Guide.
US GAAP vs IFRS Goodwill Impairment: Key Differences
| Factor | US GAAP (ASC 350) | IFRS (IAS 36) |
|---|---|---|
| Testing Unit | Reporting unit | Cash Generating Unit (CGU) |
| Impairment Measure | Fair value of reporting unit | Recoverable amount (higher of FVLCTS or VIU) |
| Qualitative Assessment | Available (Step 0) | Not formally required (indicators monitored) |
| Non-controlling Interest (NCI) | Not grossed up for NCI | Goodwill may be grossed up for NCI |
Journal Entries: Amortization vs Impairment
Goodwill Amortization Journal Entry (Private Company)
If Alpha Corp were a private company and elected to amortise the $500,000 goodwill over 10 years using straight-line:
Annual amortization: $500,000 ÷ 10 = $50,000 per year
| Account | Debit | Credit |
|---|---|---|
| Goodwill Amortization Expense | $50,000 | — |
| Accumulated Amortization — Goodwill | — | $50,000 |
Goodwill Impairment Journal Entry (Public Company)
Under the impairment-only model, Alpha Corp (as a public company) records no annual amortization. After the impairment test confirms a $300,000 loss:
| Account | Debit | Credit |
|---|---|---|
| Goodwill Impairment Loss | $300,000 | — |
| Goodwill | — | $300,000 |
For the complete journal entry breakdown, see Goodwill Impairment Journal Entry (With Examples).
Alpha Corp Comparison: Amortization vs Impairment Over 5 Years
This table compares the goodwill carrying amount and cumulative expense under both methods, assuming Alpha Corp's $500,000 goodwill and a $300,000 impairment at the end of Year 1 (impairment scenario only).
| Year | Amortization: Annual Expense | Amortization: Goodwill Balance | Impairment: Annual Expense | Impairment: Goodwill Balance |
|---|---|---|---|---|
| Year 0 (Acquisition) | — | $500,000 | — | $500,000 |
| Year 1 | $50,000 | $450,000 | $300,000 | $200,000 |
| Year 2 | $50,000 | $400,000 | — | $200,000 |
| Year 3 | $50,000 | $350,000 | — | $200,000 |
| Year 5 | $50,000 | $250,000 | — | $200,000 |
This comparison reveals a key difference: under amortization, the goodwill balance declines gradually and predictably. Under impairment-only, the balance can drop sharply in one period and then remain flat for years if no further impairment is identified.
Pros and Cons of Each Method
Goodwill Amortization
| Pros | Cons |
|---|---|
| Lower cost — no annual valuation required | May not reflect economic reality (goodwill may increase in value) |
| Predictable, smooth earnings impact | Arbitrary useful life estimation |
| Simpler for private companies | Reduces book value of goodwill even when acquisition performs well |
Goodwill Impairment (Impairment-Only)
| Pros | Cons |
|---|---|
| Reflects economic reality — only written down when value declines | Annual valuation is costly and complex |
| No artificial earnings drag when acquisitions perform well | Large, lumpy charges can surprise investors |
| Required for comparability across public companies | Subject to management bias in fair value assumptions |
The FASB vs IASB Debate
The question of whether goodwill should be amortised or tested only for impairment has been a long-running debate between the FASB and IASB. Key positions:
FASB's Position
FASB has maintained the impairment-only model for public companies since 2001 (SFAS 142). The rationale: goodwill represents economic value that may not decline systematically, and arbitrary amortization over an assumed useful life does not convey useful information to investors. FASB's 2014 private company alternative recognised that the cost-benefit trade-off is different for non-public entities.
IASB's Position
The IASB also adopted an impairment-only approach when IFRS 3 replaced IAS 22 in 2004. However, debates continue about whether the impairment test is effective at signalling when acquisitions fail — critics argue that management assumptions in DCF models allow companies to delay recognising impairment.
Ongoing Discussions
Both FASB and IASB have undertaken post-implementation reviews of their business combination standards. Some stakeholders have advocated reinstating amortization for public companies, arguing it would reduce complexity and cost. As of the publication of this article, neither board has changed the impairment-only requirement for public companies.
Related Articles
- Goodwill Impairment Complete Guide — the full pillar on goodwill impairment
- Goodwill Impairment Test (ASC 350) — how the quantitative test works
- Goodwill Impairment Journal Entry — record impairment correctly
- How to Calculate Goodwill — understand what gets amortised or tested
- Depreciation Accounting — amortization of tangible assets for comparison
- IAS 40 Investment Property Guide — IFRS treatment of other long-term assets
The differences between US GAAP and IFRS goodwill treatment are a favourite exam topic. Eduyush's CPA course covers ASC 350, IFRS 3, and IAS 36 side by side — with comparison tables, practice questions, and exam-focused summaries.
Explore the CPA Course →Frequently Asked Questions
What is the difference between goodwill amortization and impairment?
Amortization is a systematic, predictable write-down of goodwill over a defined period (e.g., 10 years). Impairment is an event-driven write-down triggered when the fair value of the reporting unit falls below its carrying amount. Public companies under US GAAP use impairment-only; private companies may elect amortization.
Can a public company amortise goodwill under US GAAP?
No. Public companies must follow ASC 350's impairment-only model. Goodwill amortization is not permitted for public entities under current US GAAP.
How long can a private company amortise goodwill?
Under ASC 350-20 (the private company alternative), goodwill can be amortised over its useful life, with a maximum of 10 years if the useful life cannot be reliably estimated. Straight-line amortization is the default method.
Does IFRS allow goodwill amortization?
No. Under IFRS 3 and IAS 36, goodwill is not amortised. All IFRS reporters use the impairment-only model, testing goodwill at the Cash Generating Unit (CGU) level annually.
What is the journal entry for goodwill amortization?
Debit Goodwill Amortization Expense and Credit Accumulated Amortization — Goodwill. For Alpha Corp amortising $500K over 10 years: Dr. Goodwill Amortization Expense $50,000 / Cr. Accumulated Amortization — Goodwill $50,000, recorded annually.
Which method is better — amortization or impairment?
Neither is universally "better" — each has trade-offs. Amortization is simpler and cheaper but may not reflect economic reality. Impairment is more economically meaningful but costly to perform and subject to management bias. Regulators have debated this for decades without a definitive resolution.
Do private companies still need to test for impairment if they elect amortization?
Yes, but only when a triggering event occurs — there is no mandatory annual test. Private companies using the amortization election also perform the test at the entity level (not reporting unit level), which is significantly simpler and less costly.
This article was written by the Eduyush Team — accounting educators and CPA exam coaches with extensive experience in US GAAP, IFRS, and professional accounting certifications. Eduyush helps thousands of students pass the CPA, ACCA, CMA, and accounting exams each year through structured courses and expert-authored content.
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