How is goodwill treated in financial statements?

Goodwill is treated in financial statements as an intangible asset that arises when a company acquires another business for a price higher than the fair value of its net identifiable assets. The International Financial Reporting Standards (IFRS), particularly IFRS 3 – Business Combinations, stipulate that goodwill must not be amortized. Instead, it is required to be tested for impairment at least annually, or more frequently if there are indicators of potential impairment.

This annual impairment testing involves assessing the carrying amount of goodwill and comparing it with the recoverable amount of the cash-generating unit (CGU) it is associated with. If the carrying amount exceeds the recoverable amount, an impairment loss must be recognized, which can significantly impact the financial statements.

The other treatment methods mentioned are not appropriate for goodwill under current accounting standards. Immediate write-off to expenses or recording it as a separate liability do not reflect the nature of goodwill or the intention of accounting for business combinations. Additionally, while goodwill could influence cash flows, it is not solely included in the cash flow statement; instead, it primarily appears in the statement of financial position and is subject to impairment tests as mentioned.