Definition:
Accumulated Goodwill Amortization refers to the total amount of amortization expense that has been recorded against goodwill on a company's balance sheet over time. Goodwill represents the premium paid over the fair value of identifiable net assets during an acquisition. Although goodwill is no longer amortized under U.S. GAAP and IFRS, it was previously amortized over a period of time.
Examples
If a company acquired another company for $1 million, and the fair value of the identifiable net assets was $800,000, the goodwill would be $200,000. If goodwill amortization was allowed and the company amortized $20,000 per year, after five years, the accumulated goodwill amortization would be $100,000.
Formula:
Accumulated Goodwill Amortization = Sum of Annual Goodwill Amortization Expenses
How to use the metric:
This metric was used to track the reduction in the value of goodwill over time due to amortization. It helped in understanding how much of the goodwill asset had been expensed and how much remained on the balance sheet.
Limitations:
Since goodwill is no longer amortized under current accounting standards, this metric is largely historical and not applicable for new acquisitions. It does not reflect the current impairment testing approach for goodwill.
Applies to:
This concept was applicable to industries where acquisitions were common, such as technology, pharmaceuticals, and consumer goods, during the period when goodwill amortization was allowed.
Doesn't apply to:
It does not apply to industries or companies that do not engage in acquisitions or to any industry under current accounting standards, as goodwill is now subject to impairment testing rather than amortization.
Summary:
Accumulated Goodwill Amortization was a measure used to track the amortization of goodwill over time, reflecting the reduction in its value on the balance sheet. While it provided insights into the expensing of goodwill, it is now obsolete under current accounting standards, which require impairment testing instead of amortization.
