The systematic process of gradually reducing the amount of a goodwill asset by recording a periodic amortization charge. In accounting practice, amortization of goodwill is usually conducted over a period of ten years (for a goodwill that has a finite life) on a straight-line basis. At times, goodwill was amortized over its useful life with a rebuttable presumption that its useful life was twenty years at most.
The amortization approach constitutes an allocation of the cost via an amortization charge. However, the amortization charge was considered an arbitrary estimate as it is not always possible to figure out the useful life and pattern of goodwill amortization. Alternatively, the impairment approach (goodwill impairment testing) was introduced where goodwill is subject to evaluation for impairment at least once a year. However, given the complexity of impairment testing, goodwill amortization comes back to the fore time and again.
In reality, treatment of goodwill would considerably differ from case to case: 1) acquired goodwill versus internally generated goodwill, and 2) for acquired goodwill, the acquisition structure whether as an asset sale or stock sale, etc.
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