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The Daily Technical #70: Do inventories get captured on the income statement?

How to answer "Can companies amortize goodwill?"

December 17, 2024

Good morning. Welcome to the 70th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Can companies amortize goodwill?

Under GAAP, public companies are prohibited from amortizing goodwill as it's assumed to have an indefinite life, similar to land. Instead, goodwill must be tested annually for impairment.

However, privately held companies may elect to amortize goodwill and under some circumstances, goodwill can be amortized over 15 years for tax reporting purposes.

Common Mistakes

  1. Assuming public and private companies follow the same rules for amortizing goodwill. Remember, public companies cannot amortize goodwill under GAAP, but private companies have more flexibility to do so.

  2. Ignoring the indefinite life assumption of goodwill. Recognize that this is why public companies test for impairment rather than amortize.

  3. Confusing amortization with impairment, treating them interchangeably. Distinguish these processes; amortization is periodic cost allocation, while impairment addresses changes in asset value.

TL;DR

  • Public companies (GAAP): Cannot amortize goodwill (assumed to have an indefinite life). Must test for impairment annually.

  • Private companies: Can elect to amortize goodwill.

  • Tax reporting: Goodwill may be amortized over 15 years under certain circumstances.

TODAY’S QUESTION
Do inventories get captured on the income statement?

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THAT’S A WRAP
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