The effect of the new goodwill accounting rules on financial statements

FASB issued SFAS 142, Goodwill and Other Intangible Assets, in June 2001. It made major changes to the accounting treatment of goodwill for the first time in over 30 years. These changes occurred concurrently with the issuance of SFAS 141, Business Combinations, which eliminated the pooling-of-interests method of accounting for business combinations, a method that avoided the goodwill issue entirely. The new accounting rules have had a substantial effect on financial statements, as evidenced by an analysis of the 100 public companies with the largest reported goodwill balances. SFAS 142 made 2 major changes to goodwill accounting: 1. Amortization of all goodwill ceased, regardless of when it originated. Goodwill is now carried as an asset without reduction for periodic amortization. 2. Companies are to assess goodwill for impairment at least annually. If goodwill is impaired, its carrying amount is reduced and an impairment loss is recognized. The substantial transition write-offs upon adoption of SFAS 142 suggest that the guidance in the prior standard, SFAS 121, did not trigger many goodwill write-offs.