Under FRS 102, goodwill always has a finite useful life and must be amortised on a systematic basis over that life. Directors estimate the life from the facts of the acquisition; only in exceptional cases, where no reliable estimate is possible, do they choose a period, and that period cannot exceed 10 years. Goodwill is also tested for impairment whenever there is an indication of a problem, and a goodwill impairment can never be reversed.

Why does goodwill have to be amortised at all?

Goodwill acquired in a business combination is recognised as an asset at the acquisition date and initially measured at cost, being the excess of the cost of the combination over the acquirer’s interest in the net identifiable assets, liabilities and contingent liabilities (FRS 102 paragraph 19.22). After that, paragraph 19.23 requires it to be carried at cost less accumulated amortisation and accumulated impairment losses. Paragraph 19.23(a) states that goodwill shall be considered to have a finite useful life and points to the amortisation principles for intangible assets in paragraphs 18.19 to 18.24.

Company law says the same thing. Paragraph 22 of Schedule 1 to both the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 and the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 requires intangible assets to be written off over their useful economic life. So a company preparing accounts under FRS 102 cannot carry goodwill indefinitely at cost. How the goodwill figure itself is calculated in group accounts is covered in FRS 102 consolidated accounts.

How do directors decide the useful life of goodwill?

The useful life is a management estimate based on how long the acquired business is expected to generate benefits beyond those captured in the separately recognised assets. FRS 102 does not give a list of acceptable periods. In practice, directors usually consider points such as:

  • how long customer relationships, contracts or referral sources acquired with the business are expected to last;
  • the stability of the industry and the speed of technological or regulatory change;
  • how dependent the business is on the former owners or key staff, and how long their influence will continue;
  • the period over which the buyer expects to recover the price it paid, as shown in its acquisition model; and
  • any legal or contractual limits, since paragraph 18.19 says the life of an intangible asset arising from contractual or legal rights cannot exceed the period of those rights.

Document the estimate at the time of the acquisition, because paragraph 19.25(g) requires the useful life to be disclosed.

What happens if the useful life cannot be estimated reliably?

Paragraph 19.23(a) provides that if, in exceptional cases, an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed 10 years. Schedule 1 paragraph 22(2) and (3) to the accounts regulations say the same: where the useful life cannot be reliably estimated the asset is written off over a period chosen by the directors, which must not exceed ten years. Paragraph 22(4) then requires that period, and the reasons for choosing it, to be disclosed in a note.

Two points are often missed. First, 10 years is a ceiling for the exceptional case, not a default for every acquisition. The FRC’s basis for conclusions (paragraph B19.3) explains that the 10 year maximum was introduced in July 2015 when implementing the EU Accounting Directive and was expected to have limited impact because it applies only in exceptional cases. Second, where the directors can make a reliable estimate, that estimate is used whether it is shorter or longer than 10 years. Paragraph 19.26B requires continuing disclosure, for each earlier combination where no reliable estimate was possible, of the period used and the supporting reasons.

How is goodwill amortised in practice?

Paragraph 18.21 requires the depreciable amount to be allocated on a systematic basis over the useful life, with the charge going to profit or loss. Paragraph 18.22 says the method should reflect the pattern in which the benefits are consumed and, if that pattern cannot be determined reliably, the straight line method is used. For goodwill, straight line is almost always the result. Goodwill is recognised at the acquisition date, so amortisation runs from that date.

Residual value is assumed to be zero under paragraph 18.23 unless there is a third party commitment to buy the asset or an active market, neither of which applies to goodwill. Paragraph 18.24 requires the useful life to be reviewed where indicators suggest it has changed, such as a change in how the business is used. A revised life is a change in accounting estimate, applied prospectively, not a prior period adjustment; see accounting policies, estimates and errors.

What does amortisation look like in numbers?

Illustration only. A company with a 31 December year end buys a trade and its assets on 1 April 2026 for £500,000. The fair value of the identifiable net assets is £380,000, so goodwill is £120,000. The directors expect the acquired client base to deliver benefits for about eight years and choose a straight line life of eight years, which gives £15,000 a year.

Year ending Amortisation Carrying amount at year end
31 December 2026 (9 months) £11,250 £108,750
31 December 2027 £15,000 £93,750
31 December 2028 £15,000 £78,750

In 2028 the business loses its largest client and the directors identify an impairment of £40,000. Goodwill falls to £38,750. The remaining life from 1 January 2029 is five years and three months, so future amortisation is about £7,381 a year. The impaired amount is never added back, even if trading later recovers.

When must goodwill be tested for impairment?

Paragraph 19.23(b) sends goodwill impairment to Section 27. Under paragraph 27.7 an entity assesses at each reporting date whether there is any indication of impairment, and only estimates recoverable amount if there is. Paragraph 27.9 lists minimum indicators, including adverse changes in the market or legal environment, rising interest rates that affect the discount rate, net assets exceeding the entity’s market value, and internal evidence that performance is worse than expected.

Because goodwill cannot generate cash flows by itself, paragraph 27.24 requires its recoverable amount to be measured through the cash generating units it belongs to. Paragraph 27.25 allocates goodwill from the acquisition date to the units expected to benefit from the synergies of the combination. Where goodwill cannot be allocated on a non arbitrary basis, paragraph 27.27 allows testing at the level of the acquired entity if it has not been integrated, or the whole group excluding unintegrated entities if it has. When a unit is impaired, paragraph 27.21 allocates the loss first to the goodwill in that unit and then to its other assets pro rata. For a unit that is not wholly owned, paragraph 27.26 requires the goodwill to be notionally grossed up for the non controlling interest before the comparison.

Can a goodwill impairment be reversed?

No. Paragraph 27.28 states that an impairment loss recognised for goodwill shall not be reversed in a subsequent period. Schedule 1 paragraph 20(1A) to the accounts regulations also says a provision made for diminution in value of goodwill must not be written back to any extent. Other assets can have impairments reversed when the reasons cease to apply (paragraph 27.29), so a group with a recovering subsidiary may reverse impairments on property or plant but not on the goodwill. Goodwill also cannot be revalued: Schedule 1 paragraph 32(1) allows intangible fixed assets other than goodwill to be included at current cost.

What must the accounts disclose, and what goes wrong?

Paragraph 19.26 requires a reconciliation of the carrying amount of goodwill from the start to the end of the period, showing new goodwill, amortisation, impairment losses, goodwill derecognised on disposals and other changes. For combinations in the period, paragraph 19.25(g) requires the useful life and, where it cannot be reliably estimated, the reasons for the period chosen. Common mistakes include:

  • defaulting to 10 years for every acquisition instead of estimating a life;
  • not reviewing the life when the acquired business is restructured or a major client leaves;
  • reversing a goodwill write down when results improve;
  • leaving goodwill on the balance sheet after the acquired trade has been sold or closed.

Does goodwill amortisation get corporation tax relief?

Not automatically, and the tax result rarely matches the accounts. HMRC’s Corporate Intangibles Research and Development Manual at CIRD11070 explains that goodwill arising only on consolidation, where a company bought shares, does not appear in any company balance sheet and is outside the intangibles regime in Part 8 of the Corporation Tax Act 2009. For goodwill bought with a trade and assets on or after 1 April 2019, CIRD44055 and CIRD44065 explain that relief is given at a fixed rate of 6.5% a year rather than following the book amortisation, and only where qualifying intellectual property is acquired with the business. Relief is restricted where the goodwill costs more than six times the qualifying intellectual property, and there are separate restrictions for goodwill acquired from a related individual or firm, which commonly affects incorporations of a sole trade or partnership. The book amortisation is added back and the tax relief, if any, is computed separately.

Where a purchase produces a credit balance rather than goodwill, see negative goodwill. Where the combination is a reorganisation within a group, no goodwill arises if merger accounting is used.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.