Explain how goodwill is accounted for and disclosed

Goodwill arises only in a business combination: in the simple case of buying all of a company, it is the consideration paid less the fair value of the identifiable net assets acquired (with a non-controlling interest or a previously held stake, those are added to the consideration), so it captures what cannot be separately identified, such as expected synergies and an assembled workforce. Internally generated goodwill is never recognised, which is why an acquisitive company and an organic grower with the same economics can show very different balance sheets. Goodwill is not amortised under IFRS or, for public companies, US GAAP; it is tested for impairment at least annually, at the cash-generating unit under IFRS and the reporting unit under US GAAP. Under IFRS a single-step test compares the unit's carrying amount with its recoverable amount (the higher of fair value less costs of disposal and value in use); the loss is charged first to goodwill and any excess is spread pro rata over the unit's other assets. Under US GAAP the loss is the excess of the reporting unit's carrying amount over its fair value, capped at the goodwill. Under both IFRS and US GAAP, goodwill impairments are never reversed. Disclosures include a reconciliation of the balance, its allocation to units and the key assumptions behind the impairment test. Analysts often strip goodwill out when comparing firms.