Question

How is excess fair value amortization different from goodwill? Can you provide an example?

Answer 1

Goodwill amortization takes place when the goodwill is systematically expensed over a specific period over the book value of the goodwill. For example, if the purchase value of the assets is more than the book value of the assets and goodwill is created. The said goodwill is amortised over a period of 10 years through charging 10% of the book value per year as an expense.

Fair Value amortization takes place when the year-end value of the assets is less than the fair value or market value of the assets. The assets are recorded at market value while booking the unrealized loss at the end of the year. For example, if the book value of building is more than the market value of the building at the end of the year, then fair value amortization takes place through recording the building at the market value and the difference of market value and book value is recorded at unrealized loss in the year-end balance sheet.