Working capital Fixed assets Total

$ 6 24 $30

Equity $30 Total $30

meaning that a portion of it was deducted as an expense every year over some period of time. In essence, the goodwill, like any asset, had to be depreciated until it was completely written off.

The amortization of goodwill was something that firms generally disliked because it reduced reported earnings. However, notice that the amortization deduction was strictly non-cash. Unlike true depreciation, it was not even a tax-deductible expense, so financial analysts just routinely ignored it.

Despite the cash flow irrelevance of goodwill amortization, FASB's decision to require purchase accounting caused a great deal of protest, much of it due to the treatment of goodwill and its impact on reported earnings. As a compromise, in 2001 FASB eliminated the requirement that goodwill be amortized and put in place a new rule. In essence, the new rule says that each year firms must assess the value of the goodwill on their balance sheets. If the value has gone down (or become "impaired" in accounting-speak), the firm must deduct the decrease; otherwise, no amortization is required.

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