If you are a private company and have goodwill on the books as a result of an acquisition or equity method investments, you now have the option to amortize it on a straight-line basis for up to ten years.  In January of 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update allowing private companies to amortize goodwill.  The standard takes effect for annual periods ending after December 15, 2014.

If you choose to amortize goodwill, you don’t have to perform annual goodwill testing, but you still have to test goodwill if a “triggering” event indicates that the fair value of an entity (or reporting unit) is less than its carrying value. 

Two reasons a company might want to amortize goodwill are: (1) costs and time savings from foregoing the annual valuation process and (2) bringing book accounting income and tax accounting income more in line since goodwill may be amortizable for tax purposes.

Some reasons not to amortize goodwill are: (1) amortization of goodwill may impact compliance with bank ratios, (2) amortization reduces earnings with a non-cash charge, (3) tax amortization of goodwill is over 15 years, so you will still have a book to tax difference, and (4) amortization will affect metric comparisons to public companies which don’t amortize goodwill.

If you want to amortize goodwill, you must make the accounting election to do so.  For many small companies, this election could mean substantial annual cost savings in forgone annual impairment testing fees.  The main thing to be aware of is the potential impact on compliance with bank covenants that amortizing goodwill may have.