Goodwill amortization is a concept that is no longer used under current accounting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Instead, goodwill is tested annually for impairment. However, in some cases and under specific older standards or for private companies using the Private Company Council (PCC) alternatives in the U.S., goodwill might still be amortized.
I'll provide an example of how goodwill amortization would be recorded, as well as how to handle goodwill impairment under current standards.
Goodwill Amortization (Historical or PCC Alternative)
Scenario: ABC Pvt Ltd acquired a business and recorded ₹5,00,000 as goodwill. The goodwill is amortized over 10 years.
Annual Amortization Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Amortization Expense A/c | 50,000 | |
| To Goodwill A/c | 50,000 | |
| (Being annual amortization of goodwill) |
Explanation:
- Amortization Expense A/c is debited to recognize the annual amortization expense.
- Goodwill A/c is credited to reduce the carrying amount of goodwill.
Goodwill Impairment (Current Standards)
Scenario: ABC Pvt Ltd tests its goodwill annually and determines that the goodwill is impaired by ₹1,00,000.
Impairment Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Impairment Loss A/c | 1,00,000 | |
| To Goodwill A/c | 1,00,000 | |
| (Being recognition of goodwill impairment) |
Explanation:
- Impairment Loss A/c is debited to record the loss due to impairment.
- Goodwill A/c is credited to reduce the carrying amount of goodwill by the impaired amount.
Example: Recording Goodwill and Subsequent Impairment
Scenario: ABC Pvt Ltd acquired a business and recorded ₹5,00,000 as goodwill. After one year, the company tests for impairment and determines the goodwill has been impaired by ₹1,50,000.
Initial Goodwill Recording
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Goodwill A/c | 5,00,000 | |
| To Cash/Bank A/c | 5,00,000 | |
| (Being recognition of goodwill from business acquisition) |
Explanation:
- Goodwill A/c is debited to recognize the acquired goodwill.
- Cash/Bank A/c is credited to reflect the cash outflow for the acquisition.
Goodwill Impairment Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Impairment Loss A/c | 1,50,000 | |
| To Goodwill A/c | 1,50,000 | |
| (Being recognition of goodwill impairment) |
Explanation:
- Impairment Loss A/c is debited to record the loss due to impairment.
- Goodwill A/c is credited to reduce the carrying amount of goodwill by the impaired amount.
These entries cover both the amortization (for historical or specific cases) and the impairment of goodwill under current accounting standards.
