Question

In accounting what is the difference between a statutory and useful life ? And regarding goodwill why is it annually tested for impairement my book says that’s when the book value exceeds fair value ? Can you explain clearly

Answer 1

In accounting statutory life is a predefined life. The statutory life is usually defined by statutory tax authorities. In accounting statutory life of an asset is used to compute depreciation for tax purposes. On the other hand useful life is the period of time over which an asset is expected to be available for use. While statutory life is used to compute depreciation for tax purposes useful life is generally used to compute depreciation for book purposes.

Goodwill is annually tested for impairment to determine whether the carrying value of the goodwill exceeds its fair value. When this happens then goodwill impairment is charged. It should be noted that goodwill is recorded after acquisition of assets and liabilities and the price paid for them is greater than the identifiable value. Annual testing enables to determine any deterioration in the power of the assets that have been acquired to generate cash flows. When this happens then the fair value of the goodwill falls below its book value.