March 2002

Goodwill And Intangible Assets: A Ten-Step Program for Public and Nonpublic Entities

By Robert N. Waxman

Under SFAS 142 (issued June 2001), goodwill and certain intangible assets with an indefinite life are no longer amortized, but are tested for impairment; an intangible asset with a finite life is amortized over its useful life; and negative goodwill is recorded as extraordinary income. Furthermore, equity-method goodwill will no longer be amortized.

Implementing SFAS 142 will be challenging and entail a lot of preparatory work. The challenges will include making the various fair value measurements; deciding when there is an event or circumstance requiring impairment testing; performing the tests; and determining reporting units, useful lives, residual values, and amortization methods. Management and auditors should immediately begin to analyze the impact of implementing SFAS 142.

Ten Steps

The following ten-step program forms a general outline of some of the implementation issues to be considered:

1. Scope. SFAS 142 applies to all entities, both public and nonpublic, if:

2. Transition. Review the SFAS 142 effective and transition dates to determine when it applies to an entity (para. 48–59).

3. Intangible assets. Segregate and reclassify intangible assets that meet the separability criteria from those that do not. Those that do not are subsumed in goodwill (SFAS 141, para. 39). Then, segregate intangible assets with indefinite lives from those with finite lives.

For an intangible with a finite life (para. 12–15):

For an intangible with an indefinite life (para. 16–17):

4. Goodwill.

5. Taxes. Recompute deferred tax assets and liabilities related to impairment losses, transition adjustments, and reclassifications (para. 41, 43, 49).

Classifications. Reclassify intangible assets and goodwill to comply with SFASs 141 and 142. This includes reclassifying certain intangibles to goodwill and separating certain intangibles from goodwill, along with any related deferred taxes (SFAS 141, para. 61; SFAS 142, para. 49; EITF Topic D-100).

7. Transition: Intangibles. Perform the transitional intangible asset impairment test in the first interim period of SFAS 142 adoption. Any impairment loss is recorded as an “effect of a change in accounting principle.”

8. Transition: Goodwill. Perform the transitional goodwill impairment test. Any impairment loss is recorded as an “effect of a change in accounting principle.” Step one of the test must done within six months of the initial adoption of FASB 142. Step two must be done before the end of the year of initial application of FASB 142.

9. Disclosures.

10. New developments. Continue to monitor ongoing developments from the FASB, EITF, and SEC.

Robert N. Waxman, CPA, is managing director, Corporate Finance Advisory, New York City.


Robert H. Colson, PhD, CPA
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