Why is goodwill not amortised in financial statements?

Why is goodwill not amortised in financial statements?

• A. Because impairment testing compares recoverable amount to carrying amount
• B. Because it's a cash asset
• C. Because goodwill has an indefinite life
• D. Because it's not recognised in financial statements

Answer: (A)

Goodwill is not amortised because it’s treated as having an indefinite useful life and is therefore carried at cost and tested for impairment rather than allocated over time. Under IAS 36, an annual impairment test is performed to compare the recoverable amount of the cash-generating unit to its carrying amount. The recoverable amount is the higher of fair value less costs of disposal and value in use; if this is less than the carrying amount, an impairment loss is recognised against goodwill. This method prevents overstatement of goodwill and reflects that its value depends on future performance, which can change.

Goodwill is not amortised because it’s treated as having an indefinite useful life and is therefore carried at cost and tested for impairment rather than allocated over time. Under IAS 36, an annual impairment test is performed to compare the recoverable amount of the cash-generating unit to its carrying amount. The recoverable amount is the higher of fair value less costs of disposal and value in use; if this is less than the carrying amount, an impairment loss is recognised against goodwill. This method prevents overstatement of goodwill and reflects that its value depends on future performance, which can change.