Amortization And Impairment Of Goodwill

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Amortization Versus Impairment of Goodwill:
Impact on Accounting Quality, Financial Statements’ Economic Value, Investors, and Auditors Accounting Standards Codification (ASC) replaced all U.S. financial accounting standards in July 2009. Consequently, ASC 350, Intangibles – Goodwill and Other, replaced SFAS 142, Goodwill and Other Intangible Assets in September 2011. Under ASC 350, goodwill must be periodically tested for impairment. Goodwill impairment is determined through a two-step process outlined in ASC 350. However, in January 2014, an update to ASC 350 was released, which authorized an alternative method of accounting for goodwill servicing private companies that could consequently reduce their costs and simplify their accounting methods. Additionally, the international standard for goodwill impairment, IFRS 3, specifically mandates that companies must annually test goodwill for impairment. The specifics of the impairment test are entailed in IAS 36 Impairment of Assets, the international standard for accounting for goodwill associated with business combinations. This paper will analyze the effects of the accounting policies enacted under these standards and in particular analyze the efficiency of impairment testing methods versus amortization of goodwill and the connection of impairment methods with managerial and CEO compensation and earnings management. Finally, this paper will analyze if impairment testing under ASC 350 and IAS 36 or amortization, which is
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