Countries have historically followed different ways of accounting for many items,

including goodwill. With the ramped pace of globalization the International Accounting
Standards Board (IASB) has strived to achieve a global accounting standard.
To facilitate this goal it has been working with the United State’s Financial Accounting
Standards Board (FASB), to merge the accounting standards of the US GAAP and the
IFRS.

On June 29, 2001, FASB issued two pronouncements that have since had a huge impact
on mergers and acquisitions and their corresponding goodwill. The FASB
pronouncements include SFAS No. 141 - Accounting for Business Combinations, and
SFAS No. 142 - Accounting for Goodwill and Other Intangible Assets. Under the new
accounting standard No. 141, the pooling of interest method was eliminated, therefore
making it mandatory for all subsequent acquisitions initiated after July 2001 to follow the
purchase accounting method [1].
On the other hand, in 2004 the IASB revised International Accounting Standard (IAS)
36-Impairment of Assets and IAS 38-Intangible Assets. Following the direction of the
American Generally Accepted Accounting Principles (US-GAAP), the IASB made
similar changes - accounting for Business Combinations, and accounting for Goodwill
and Other Intangible Assets [2]. This change set the new standards to require that all
business combinations after March 2004 must be accounted by using the purchase
method and that goodwill was no longer amortized but has to be tested for annual
impairment.
Through my research I have found out the key similarities and differences when
comparing treatment of goodwill between US GAAP and IFRS arise in the measurement
of goodwill, the impairment of goodwill, the testing methods, the elimination of
impairment losses, and negative goodwill.

Similarities

1. For the impairment of goodwill both the IFRS and US GAAP treat
impairment annually or more frequently if certain indicators
point towards additional impairment.

2. In treating negative goodwill both the IFRS and US GAAP take

any discount on acquisition to the profit and loss statement.

3. In case of acquisitions, managements are enjoined to isolate

specific intangible assets and value them separately from
goodwill. The list of these intangible assets includes patents,
brands, trademarks and computer software.

Differences

1. For the measurement of goodwill, IFRS measures the difference

between the cost of acquisition over the acquirer’s interest in the
net fair value of the identifiable assets, liabilities and contingent
 liabilities, while US GAAP goodwill is measured as the excess of
the cost of acquisition price over the fair value of acquired net
assets.

2. For the testing methods, IFRS does not use the two-step process,
while the US GAAP uses the two-step process.

3. The test for impairment of goodwill under the IFRS, unlike US GAAP, occurs at
the level of the Cash Generating Unit.
4. For the elimination of impairment losses, even though the IFRS
does not permit reversals of impairment losses relating to
goodwill, it permits reversals of other tangibles. But the US GAAP
does not permit reversals in any circumstance.

5. Capitalization of development costs is allowed only when development efforts

result in the creation of an identifiable asset, e.g. software or processes, whose
beneficial life and costs can be measured reliably. However, for US GAAP
however stipulates that all Research and Development costs be immediately
certain development costs pertaining to website and software development are
however allowed to be capitalized.
Sources for similarities and differences: [1] [2] [3]

The distinction of the US GAAP rules based and the IFRS principles based reporting
standards stems from their core definitions. A rule based reporting standard tends to be
more bureaucratic and rigid, while a principle based reporting standard tends to be more
decentralized and flexible. The main advantages of principles based standards are its
broad guidelines, making it more flexible and applicable in different situations – a
necessity in today’s global and evolving industry. It also provides the opportunity for
organizations to navigate around the pitfalls associated with rigid requirements that allow
contracts to be written specifically to manipulate their intent. Finally, principle-based
standard give accountants the opportunity to utilize their professional experience to
analyze a transaction, as opposed to the check list approach that we see with rule based
reporting standards. On the other hand, there are certain areas where rule based reporting
standards prevail over principle based reporting standards. Without a rigid set of rules, an
organization adopting the principle-based standard would lake precise guidelines, which
could cause inconsistencies in the applications of standards across organizations. Finally,
another drawback to a principle-based standard is the potential for cumbersome litigation
due to the absence of rigidly structured rules.
Sources

3 Mateja Jerman, Massimo Manzin, Organizacija Volume 41, Accounting

Treatment of Goodwill in IFRS and US GAAP

4 Accounting for goodwill: are we better off?(a discussion of new

goodwill rules for accounting)
By Marc F. Massoud & Cecily A. Raiborn
http://www.entrepreneur.com/tradejournals/article/102270930_1.html

3. Conclusion
Both methods of accounting, US GAAP and IFRS, while they have taken different routes,
and have changed their accounting standards at different times, have now arrived at
similar positions in the treatment of a number of items, including valuation and treatment
of goodwill. The differences that exist today in this area are primarily in the area of
detailing, methods of computation and in the treatment of individual components of the
accounting requirements, like for example, in the computation of impairment of goodwill.
Both PWC and Deloitte publications opine that US GAAP will most probably move
further towards the IFRS position intangible assets as part of the ongoing convergence
exercise