The season of goodwill (amortised over 20 years)

Do any of your clients have goodwill in their accounts? Do you audit accounts with goodwill in them? Do your accounts have goodwill in them? If the answer to any of these questions is yes, then you may have some important justifications to make.

Goodwill in a set of accounts prepared under FRS 102 is amortised on a systematic basis (typically straight-line) over its useful life. It is not possible to have an indefinite useful life for goodwill under FRS 102.  

In all but exceptional cases, an entity will be able to make a reliable estimate of the useful life of the goodwill and will, therefore, amortise it over this period. By its nature, this is an estimate – there does not need to be certainty over the useful life.

In those exceptional cases where the entity is unable to make a reliable estimate, the useful life shall not exceed 10 years (it may well be a shorter period). A 10 year useful life is not a default though – where it is possible to reliably estimate the useful life of the goodwill that period must be used.  

FRS 102 also requires the entity to assess at each reporting date whether there is an indication that an asset, such as goodwill, may be impaired. Where such an indication exists, an impairment review will need to be conducted to assess the asset’s recoverable amount and to determine whether an impairment charge is to be recorded.

From an audit perspective, the auditors should be assessing not just the application of, but also the basis for useful economic lives being used and whether the entity has considered events or circumstances indicate that the carrying value may not be recoverable.