Why amortisation of goodwill is not permissible?

Why amortization of goodwill is prohibited under international accounting standards IASs, IFRSs and that is not permissible even under US GAAPs. Why it has to be impaired and not amortised? And what is the difference between impairment and amortisation in this case?
Before IFRS 3 was introduced, entities were allowed to amortize goodwill. However, after it was introduced back in 2004-2005, amortization of goodwill was strictly prohibited and entities were required to follow impairment regime. As a result, entities are required to test purchased goodwill for impairment loss on annual basis. Getting deeper in accounting history, we can see that US GAAPs back in 2001 abandoned amortization of goodwill in favour of impairment of goodwill approach. IAS 38 defines amortisation and impairment loss as follows:

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over
its useful life.

Impairment loss is the amount by which the carrying amount of an asset or a cash-generating
unit exceeds its recoverable amount. Another important term to be defined before we discuss the question in hand is goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. In other words goodwill is an unidentifiable or inseparable asset. An asset is said to be identifiable when it can be separated from an entity and can be sold or exchanged without selling the whole entity. For example Plant and Machinery of an entity can be sold without selling the business. But its repute cannot be separated and sold individually and when the entity as a whole is sold, its repute gets transferred to new buyer with the entity. But why impairment approach is preferred over amortisation approach.

Following are some of major reasons:

Amortisation is a systematic allocation of value of asset over its useful life. It is extremely difficult to assign any life span to goodwill. Therefore no such method is yet devised which can amortise infinite life assets. Morover, IAS 38 states very clearly in respect of intangible assets with indefinite life that they should be tested for impairment loss on periodic basis instead of amortisation.

Technically speaking, the rate at which asset is amortized is required to be in line with the rate at which benefits are rendered by the same intangible asset. Speaking of goodwill, it is really hard to value the benefits goodwill generates over a period of time. And due to this amortisation charge cannot be linked to the economic benefits rendered in particular accounting period. Therefore, impairment is more suited so that goodwill is reduced only when it is needed instead of consistent reduction in an asset with no logical reasoning behind it. Because impairment is based on reasons or in terms of IAS 38 indicators. So whenever goodwill is impaired, users will be given with supportive information and reasons instead of baseless annual amortisation. This becomes even more important in case of large business acquisitions or mergers with significant amount of goodwill involved. In other words, following the impairment approach, accounting is more timely and thus more relevant. Another thing to understand is that amortisation of goodwill is different from amortization or depreciation ofidentifiable assets in many different aspects. Although depreciation or amortisation expenses are not real expenses and thus for some distort the financial performance figures of the entity but still these charges provide some useful information to the users as they need to know when outflow will occur to replace the asset and secondly how much profits of the entity are dilutedbecause of such notional expenses. But goodwill is not replaced. Therefore, any amortisation charge in respect of goodwill does not make any sense. Another reason on similar basis as above is that investors like to know how much money was actually invested towards goodwill at acquisition. Any annual amortisation will distort this figure and with the passage of time we will completely loose the track of original goodwill. However, this can be avoided by accumulating amortisation charge in a separate account just like accumulated depreciation to preserve the goodwill amount. But again, as said above, amortisation charge in the income statement is not providing any useful information to the users. So abandoning amortisation method in favour of impairment appears to provide better reporting basis. Yet another reason from investors perspective is that if entities are allowed to amortise goodwill then they may follow different approaches to amortise or simply different rates of amortisation which may cause financial statements of an entity to be incomparable with competitors financial statements. Critics however claims that impairment model opens the door to subjective accounting and thus financial reporting may be degraded for that reason because impairment involves judgement and estimation of effects of indicators.

In the end we can see that choosing between amortisation and impairment is just like choosing between two evils and then getting settled with lesser evil or at least what according to majority is less evil.

What is Negative goodwill and its accounting treatment?

What is negative goodwill and under what circumstances negative goodwill arises. Also explain how negative goodwill is treated in the books of accounts of the relevant companies
Goodwill has been defined under IFRS 3 as following: An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. On analysing the definition we can understand that goodwill is an asset but is not the asset which can individually be identified and thus recognized separately. Goodwill is measured by comparing: (A) the aggregate of consideration transferred by the acquirer + Non-controlling interest + any previous equity interest in acquiree held by acquirer WITH (B) The net identifiable assets acquired and the liabilities assumed Usually (A) is more then (B) in business combinations and a positive good will arise in this case. However, in some cases (B) can exceed (A) in which case negative goodwill will arise. IFRS 3 discusses it as gain on a bargain purchase.

Why negative goodwill or gain on bargain purchase may arise?

Negative goodwill or gain on bargain purchase or simply bargain purchase may arise because of: forced sale recognition or measurement exceptions for particular items discussed under IFRS 3 error in the valuation of identifiable assets, non-controlling interest and/or equity interest.

Conditions to be fulfilled In case a negative goodwill arises then before this gain is recognized, acquirer must review the calculations to make sure that everything is arithmetically correct and no mistakes are made in measurement of different elements as negative goodwill does not arise normally and IFRS 3 requires the reassessment is done to be sure that no mistakes are made.

Accounting treatment of negative goodwill

Once it is confirmed that resultant is negative goodwill than the resulting gain should be recognized in the profit and loss at the acquisition date in the books of acquirer i.e. it will be

taken as a gain in the consolidated income statement of the acquirer. All of the gain should be attributed to the acquirer.

Investopedia explains 'Negative Goodwill'

Negative goodwill is based on the concept of goodwill, an intangible asset that represents the worth of a company's brand name, patents, customer base and other items that are difficult to price but that help to make a company valuable. Most of the time, a company will be purchased for more than the value of its tangible assets, and the difference is attributed to goodwill. When the price paid is less than the actual value of the company's net assets, you have negative goodwill.

Definition of 'Negative Goodwill'

A gain occurring when the price paid for an acquisition is less than the fair value of its net tangible assets. Negative goodwill implies a bargain purchase. Negative goodwill may be listed as a separate line item on the acquiring company's balance sheet and may be considered income. For the purchased company, negative goodwill often indicates a distress sale, and the unfavorable sale conditions lead to a depressed sale price.

NEGATIVE GOODWILL arises where the net assets at the date of acquisition, fairly valued, exceed the cost of acquisition. It is reflected on the balance sheet net of other intangible assets. Negative goodwill is recognized as income as follows:

To the extent that negative goodwill relates to expected future losses and expenses, it is recognized in the income statement when the future losses and expenses are recognized. The amount of negative goodwill relating to identifiable non-monetary assets (not exceeding the fair values of such acquired assets), is recognized as income on a systematic basis over the remaining useful lives of the identifiable acquired depreciable/amortizable assets with a maximum of 20 years. The amount of the negative goodwill in excess of the fair values of the acquired identifiable nonmonetary assets is recognized as income immediately. The amount of the negative goodwill relating to monetary assets is recognized as income immediately

NOTE: Intangible assets are not revalued.