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CFA Level I Exam · Analysis of Long-Term Assets

Intangible Assets and Goodwill: CFA Level I Notes

Updated 7 October 2026 · Fact-checked

Intangible assets are non-physical resources with future benefits. Identifiable intangibles can be separated or arise from legal rights; goodwill is the excess of purchase price over the fair value of identifiable net assets acquired. Purchased items are capitalized, most internal costs are expensed, and goodwill is tested for impairment, not amortized.

Understand Intangible Assets and Goodwill

An intangible asset has no physical form, such as a patent, licence, brand, customer list or software. Under IFRS, it must be identifiable, controlled by the firm, and expected to give future economic benefits.

The key question is how the asset arrived. If you buy it, you capitalize the purchase price. If you build it yourself, most costs are expensed as incurred. This is why a company with a famous internally built brand often shows no brand asset, while an acquirer that buys a rival shows the rival's brand on its balance sheet.

Research and development (R&D). Under IFRS, research costs are expensed. Development costs are capitalized once criteria are met, including technical feasibility and the intent and ability to complete and use or sell the asset. Under US GAAP, R&D is generally expensed as incurred. So IFRS reporters can show higher assets and higher early profit than similar US GAAP reporters.

Software. Under US GAAP, costs of software to be sold are expensed until technological feasibility is established, then capitalized. Internal-use software costs are capitalized in the application development stage. IFRS follows the general development-cost rule.

Amortization and impairment. Intangibles with finite lives are amortized over their useful lives and tested for impairment when there are indicators. Intangibles with indefinite lives are not amortized but are tested for impairment at least annually.

Goodwill arises only in a business combination: purchase price (consideration) minus the fair value of identifiable net assets acquired. It is not amortized. It is tested for impairment at least annually. Under IFRS, goodwill is tested at the level of the cash-generating unit (CGU); under US GAAP, at the reporting unit level. Internally generated goodwill is never recognized. Goodwill impairment is a non-cash charge that cuts profit and assets, and it can never be reversed.

Key formulas to remember

Goodwill
Goodwill = Consideration transferred + Non-controlling interest (NCI) − Fair value of identifiable net assets (assets − liabilities)
For a 100% acquisition, NCI is zero. Under IFRS, NCI can be measured at fair value (full goodwill method) or at its proportionate share of the identifiable net assets (partial goodwill method). The full goodwill method gives higher goodwill. US GAAP requires NCI at fair value, so it uses full goodwill. A negative result is a bargain purchase gain in profit or loss.
Straight-line amortization
Annual amortization = (Cost − Residual value) ÷ Useful life
Residual value is usually zero for intangibles. Applies only to finite-life intangibles.
Capitalization rule (IFRS)
Research → expense; Development → capitalize once criteria are met
US GAAP generally expenses both, with software exceptions.
Impairment loss (IFRS)
Loss = Carrying amount − Recoverable amount, where recoverable amount is the higher of fair value less costs of disposal and value in use
Goodwill is tested at the cash-generating unit (CGU) level. The CGU's impairment loss is allocated first to goodwill, then to the CGU's other assets. Goodwill impairment is never reversed. Other IFRS impairments may be reversed.
Impairment (US GAAP, goodwill)
Loss = Carrying amount of reporting unit − Fair value of reporting unit (limited to goodwill)
Tested at the reporting unit level.

How to solve Intangible Assets and Goodwill questions

Use this order for any question on intangibles or goodwill.

  1. 1Decide whether the item was purchased, acquired in a business combination, or developed internally.
  2. 2If internal, apply the rule: research is expensed; development is capitalized under IFRS only if criteria are met; US GAAP expenses most of it.
  3. 3Check for special software rules (US GAAP technological feasibility or application development stage).
  4. 4For acquisitions, compute goodwill: consideration minus fair value of identifiable net assets. Do not use book values.
  5. 5Decide life: finite means amortize, indefinite or goodwill means no amortization and annual impairment test.
  6. 6If impairment applies, compute the loss using the correct framework and standard, and note that goodwill impairment is not reversed.
  7. 7State the effect on net income, assets and ratios: capitalizing raises early income, assets and CFO, and moves the spending to investing cash flow (CFI).

Quickest way: Capitalize or expense in 10 seconds

When to use it: Use for conceptual MCQs that ask which cost is capitalized or how two standards differ.

  1. Bought or acquired in a combination? Capitalize.
  2. Built internally? Expense, unless it is IFRS development with criteria met, or US GAAP software: internal-use software in the application development stage, or software for sale after technological feasibility.
  3. Goodwill? Only from acquisitions. No amortization, impairment test, no reversal.
  4. Eliminate options that amortize goodwill, capitalize internal brands or research, or recognize internally generated goodwill.

Common mistakes in Intangible Assets and Goodwill

  • Amortizing goodwill

    Students carry over the rule for finite-life intangibles.

    Fix: Goodwill and indefinite-life intangibles are tested for impairment, not amortized.

  • Using book value of net assets to compute goodwill

    The balance sheet shows book values, so they seem natural.

    Fix: Use the fair value of identifiable net assets of the target.

  • Capitalizing research costs under IFRS

    Students merge research and development into one term.

    Fix: Research is always expensed. Only development after criteria are met is capitalized.

  • Thinking US GAAP capitalizes development costs

    Mixing up the IFRS rule with US GAAP.

    Fix: US GAAP generally expenses R&D, with software as the main exception.

  • Reversing a goodwill impairment

    Students recall that some impairments can be reversed under IFRS.

    Fix: Goodwill impairment is never reversed under either framework. Under IFRS, other assets in the CGU may have impairments reversed, but goodwill may not. Remember that under IFRS the CGU's loss is allocated first to goodwill.

  • Recognizing internally generated goodwill or brands

    Students think valuable assets must appear on the balance sheet.

    Fix: These are expensed as incurred. Only acquired ones are recognized.

Worked examples

Example 1

A company buys 100% of a target for $900 million cash. The target's identifiable assets have a fair value of $1,100 million and its liabilities have a fair value of $400 million. Goodwill recognized is closest to: A) $200 million, B) $400 million, C) $500 million.

Show the solution
  1. Fair value of identifiable net assets = 1,100 − 400 = $700 million.
  2. Goodwill = 900 − 700 = $200 million.
  3. Option B, $400 million, is the liabilities alone. Option C, $500 million, comes from 900 − 400, which ignores the assets.

Answer: A) $200 million

Example 2

Under IFRS, a firm spends €3 million on research and €5 million on development. The development costs meet all capitalization criteria from the start. The new asset is amortized straight-line over 5 years, with amortization beginning in the year of spending, a full year of amortization in that year, and no residual value. What is the first-year expense effect: A) €1 million, B) €3 million, C) €4 million?

Show the solution
  1. Research of €3 million is expensed immediately.
  2. Development of €5 million is capitalized.
  3. Amortization = 5 ÷ 5 = €1 million for the year.
  4. Total first-year expense = 3 + 1 = €4 million.

Answer: C) €4 million

Exam tips

  • Most questions test IFRS vs US GAAP differences. Memorize the R&D and software rules in a small table.
  • Goodwill questions often hide a trap: use fair value, not book value.
  • Expect analyst-adjustment items, such as how capitalizing raises assets, equity and early earnings and shifts spending from CFO to CFI.
  • Eliminate any option that amortizes goodwill or reverses a goodwill impairment.
  • At 90 seconds per question, decide purchased versus internal first, and the answer is usually clear.

Practice questions from Analysis of Long-Term Assets

Intangible Assets and Goodwill in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Intangible Assets and Goodwill: frequently asked questions

What is the difference between goodwill and identifiable intangible assets?

Identifiable intangibles can be separated or come from legal or contractual rights, such as patents and licences. Goodwill is the residual of a purchase price over the fair value of identifiable net assets. Goodwill cannot be sold on its own.

How are R&D costs treated under IFRS and US GAAP?

Under IFRS, research is expensed and development is capitalized once criteria are met. Under US GAAP, R&D is generally expensed as incurred. This makes IFRS reporters' assets and early profits higher when development is capitalized.

When are software development costs capitalized?

Under US GAAP, software for sale is capitalized after technological feasibility is established, and internal-use software in the application development stage. Under IFRS, the general development criteria apply.

Is goodwill amortized?

No. Goodwill is tested for impairment at least annually. If impaired, the loss is recognized in profit or loss and is never reversed.