How are goodwill and intangible assets recognized, amortized, and tested for impairment?

Intangible assets and goodwill have unique accounting rules that differ significantly from tangible assets. Here is the breakdown.

Types of Intangible Assets

When Is Goodwill Created?

Goodwill arises ONLY from business acquisitions. It cannot be internally generated and recognized.

Goodwill = Purchase Price - Fair Value of Net Identifiable Assets

Example: Apex Holdings acquires Beacon Analytics for $15 million. The fair value of Beacon's identifiable net assets is $11 million.

Goodwill = $15M - $11M = $4 million

Internally Generated Intangibles

Under IFRS, R&D is split:

• Research costs: Expensed as incurred
• Development costs: Capitalized if six criteria are met (technical feasibility, intention to complete, ability to use/sell, probable future benefits, resources available, reliable measurement)

Under US GAAP, all R&D is expensed (with a narrow exception for software development costs after technological feasibility).

Goodwill Impairment Testing

Critical Differences:

• US GAAP uses reporting units; IFRS uses cash-generating units (CGUs)
• Neither standard allows goodwill impairment reversal
• Finite-life intangible impairment can be reversed under IFRS, but not under US GAAP

Exam Tip: The CFA exam tests whether goodwill is amortized (no), whether impairment can be reversed (no for goodwill, yes for other intangibles under IFRS), and the calculation of goodwill from an acquisition scenario.

Practice goodwill and intangibles problems in our CFA Level I question bank.