goodwill amortization is not precedent, under IFRS 3 because its useful life is unlimited.
However, it must be reviewed periodically if this asset present impairment.
Nevertheless, under generally accepted accounting principles for small and medium-sized companies, Goodwill can be amortized.
In other words, according to paragraph 19.23 of the business combination section of the IFRS for SMEs, if an entity cannot estimate the useful life of goodwill, it is assumed that the useful life is ten years.
In this way, the goodwill amortization years under these accounting principles will recognize in a maximum time of 10 years.
What is the reason it is prohibited goodwill amortization according to IFRS 3?
Goodwill is the result of paying a higher value for another company’s identifiable assets and liabilities in a business combination; let’s see an example.
Entity A acquires 100% of the shareholding of Entity B.
For this, entity A delivers a consideration to company B for 2,000,000.
On the other hand, the identifiable assets and liabilities at the fair value of entity B are equal to 1,800,000
In this case, entity A, in the consolidated financial statements, must recognize a Goodwill equivalent to 200,000.
Let’s remember that this asset is intangible with unlimited useful life, for this reason, a periodic allocation of the economic benefits associated with this asset is not possible, and as such, it cannot be depreciated.
However, this asset can lose value, and it will be necessary to recognize an impairment loss.
Thus, an intangible with an unlimited useful life should not be amortized when an entity’s management concludes, based on an analysis of all relevant factors, that there is no foreseeable limit to the period over which the asset is expected to generate cash inflows to the entity.
In other words, it is very difficult to establish the period over which a business will generate cash inflows.
In this way, we can affirm that all intangibles with an indefinite useful life, including Goodwill, should not be amortized.
In this way, we can affirm that all intangibles with an indefinite useful life, including Goodwill, should not be amortized.
This means that the goodwill amortization does not exist under the precepts of IAS 38, unless an entity uses section 19 of the IFRS for SMEs where it is possible to amortize this type of asset.
Assets with an indefinite useful life include the following:
Brands: A brand is an intangible asset that allows an entity to obtain a competitive advantage over other companies and add value to the entity.
This asset can generate economic benefits indefinitely.
Franchises: A franchise is an agreement in which one company grants another the right to use its brand, business system, and technical knowledge for an indeterminate period.
Patents: Some patents give a third party the right to an indefinite renewal of the use of this intangible.
For this reason, the useful life cannot be estimated reliably and will be considered a non-amortizable asset.
Legal rights: Legal rights and permits, such as mineral rights, oil, and gas development rights, and construction permits, often have an indefinite useful life.
In other words, until a foreseeable period is established in which the intangible will generate economic benefits, its useful life will be considered indefinite.
Concession rights: these rights include the public service concessions, such as transportation, energy, and telephone, which are generally granted for indeterminate periods; for this reason, these types of intangibles also are not amortized.
I want more information please
Relationship between intangible assets with indefinite useful life and residual value
Residual value is the value an entity expects to receive for an asset after a certain period of use.
That is, if an entity acquires an asset in year 1 for 500,000 and expects to sell it within 15 years for a value of 70,000, it means that the residual value is equal to 14% (70,000 / 500,000 x 100.
Thus, to calculate the depreciation of this asset, the residual value must be deducted from the acquisition price.
However, since an intangible with an indefinite useful life expects to generate economic benefits for an indeterminate period, it is impossible to establish a residual value for this asset.
Amortization of internally generated intangibles
In paragraph 63 of IAS 38 establish that Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.
However, exist other disbursements are generated internally that can be recognized as a higher value of the asset.
For example, the Development expenses that meet the requirements in paragraph 57 of IAS 38 must be recognized as intangible.
In this way, if an entity develops a vaccine, for example, and recognizes 700,000 in development expenses, this will be the cost of intangible.
And on the other hand, if the entity expects this vaccine to generate economic benefits for 15 years, the company must amortize this intangible during this period.