Goodwill in Accounting

D

Under US GAAP, Goodwill generated during acquisitions are capitalized; it does not allow capitalization of internally generated Goodwill.

Goodwill refers to an intangible asset that arises when one company acquires another company for a price higher than the fair value of its identifiable tangible and intangible assets. It represents the value of the acquired firm's reputation, customer relationships, brand recognition, and other non-quantifiable factors that contribute to its future earnings potential.

Let's analyze each statement provided:

I. It represents the amount paid for an acquired firm that cannot be identified with tangible assets.

This statement is true. Goodwill represents the excess purchase price paid for an acquired firm over the fair value of its identifiable tangible and intangible assets. It captures the value of intangible factors, such as brand name, customer loyalty, and intellectual property, that cannot be separately identified or valued.

II. US GAAP prohibits capitalization of Goodwill.

This statement is false. Under US Generally Accepted Accounting Principles (GAAP), goodwill is capitalized as an asset on the acquirer's balance sheet when an acquisition occurs. It is initially recorded at the acquisition cost and subsequently subject to impairment testing. Impairment occurs when the fair value of the reporting unit (the acquirer or a segment of the acquirer) falls below its carrying value, including goodwill. If impaired, the goodwill is written down to its fair value, reducing the carrying amount on the balance sheet.

III. IRS does not allow amortization of Goodwill for tax purposes.

This statement is true. The Internal Revenue Service (IRS) does not allow the amortization of goodwill for tax purposes. Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, companies were allowed to deduct the amortization of goodwill for tax purposes over a specified period, typically 15 years. However, the TCJA eliminated the ability to amortize goodwill for tax purposes for acquisitions made after December 31, 2017. Therefore, under current tax regulations, companies cannot deduct or amortize goodwill for tax purposes.

Based on the explanations provided above, the correct answer is:

D. I & III

Goodwill represents the amount paid for an acquired firm that cannot be identified with tangible assets (I), and the IRS does not allow amortization of goodwill for tax purposes (III).