How do firms account for goodwill?

Answer 1

GOODWILL

In ordinary usage, goodwill refers to various unidentifiable intangible resources of a firm,
such as a well-trained labor force or a reputation for quality products or customer service.
As previously discussed, firms that incur expenditures internally to develop these intangible
resources must treat them as expenses in the period incurred. For accounting purposes, goodwill arises only when a firm acquires another entity in an external market transaction and
pays more for that entity than the fair value of the identifiable assets net of identifiable liabilities. Goodwill is the excess of the amount paid for the acquired company over the fair value of identifiable net assets.

Goodwill, because it includes unidentifiable intangible resources, has an indefinite life. Indefinite does not mean infinite, only not knowable. Firms therefore do not amortize goodwill.
However, firms must test goodwill annually for impairment. Because a firm cannot separate
goodwill from other assets, it tests for impairment of goodwill as part of a reporting unit (U.S. GAAP), or a cash-generating unit (IFRS), which contains the goodwill. The provisions
for deciding whether a loss has occurred and then measuring the amount of the loss are
complex.