Depreciating Goodwill

As far as I know, you cannot depreciate Goodwill. Why do they do it in CFAI texts?? On p. 68 of Volume 2 is a problem where they depreciate goodwill. The exact wording is: “Assume further that the $50,000 excess (the amount by which the fair value exceeds the book value of XYZ’s net assets) is assigned to assets that can be depreciated straight-line over 5 years.” How is this different from depreciating goodwill? That is what it sounds like to me. Please explain.

I had this same question and it frustrated the heck out of me. You need to read the next couple pages. The text explains that the goodwill is directly attributed to excess paid for a depreciable fixed asset. I don’t have my texts with me but if you turn a page or two, they make a note of this in a text box on the top of the page.

The problem is that your definition of goodwill is wrong. You buy a company that owns a building they bought 50 years ago and has a book value $1,000 and its worth $100,000 today. The excess $99K that you pay for that asset IS NOT goodwill - here you are paying FMV for an asset. Goodwill is the portion of the purchase price of a company that arises when you pay $$ in excess of that which can be specifically identified with assets.

Super, that is along the line of what I was thinking. Thanks for clarifying.

Yes, the depreciation is for the FMV (under the purchase method) not goodwill. I, too, thought that they were depreciating goodwill when I first read the Reading 23 CFAI text. Then a few pages later, the text states that goodwill is carried at “cost” but subject to an annual impairment review under FASB rules.

I meant to say reading 22.

Goodwill is not amortized for GAAP but subject to annual impairment tests. For Federal Tax purposes, Goodwill can be considered a Section 197 Intangible Asset and amortized over 15-years Goodwill is the difference between purchase price (adjusted for assumed liabilities) and all tangible and recognizable intangible assets.