Which statement about goodwill and impairment testing is correct?

• A. Goodwill is amortized over 10 years; impairment is not required.
• B. Goodwill arises when purchase price exceeds the fair value of net assets; impairment is tested annually or when indicators exist; impairment reduces goodwill and is not amortized.
• C. Goodwill is amortized over 15 years; impairment is not required.
• D. Goodwill impairment is tested only if cash flows are negative.

Answer: (B)

When a business is acquired for more than the fair value of its identifiable net assets, the excess is recorded as goodwill. Goodwill isn’t amortized under modern accounting frameworks; instead, it is tested for impairment to see if its value has fallen. Impairment testing is required at least annually and also whenever indicators of decline appear. If impairment is found, the loss reduces the carrying amount of goodwill (and, if needed, other assets) rather than being expensed through amortization. This combination—goodwill arising from a purchase premium, annual or triggered impairment testing, and impairment reducing goodwill without amortization—is why this statement is correct.