CFA Level I Exam · Analyzing Balance Sheets

Intangible Assets, Goodwill and PP&E for CFA Level I

Updated 7 October 2026 · Fact-checked

Non-current assets are carried at cost less depreciation and impairment, or at revalued amounts under IFRS. Intangibles must be identifiable. Goodwill is the purchase price less the fair value of net identifiable assets acquired. It is never amortized and is tested for impairment at least annually. Solve questions by finding the carrying amount first.

Understand Non-Current Assets: PP&E, Intangibles and Goodwill

A non-current asset gives benefits for more than one year. The big three groups are property, plant and equipment (PP&E), intangible assets and goodwill. You record each at cost when you acquire it. Cost includes the purchase price plus any spending needed to get the asset ready for use, such as freight, installation and testing.

After purchase, IFRS lets you choose between two models for PP&E. Under the cost model, you carry the asset at cost less accumulated depreciation and any impairment loss. Under the revaluation model, you carry it at fair value at the revaluation date less later depreciation and impairment. You must apply the model to a whole class of assets, not to single items. US GAAP does not allow the revaluation model for PP&E held for use.

If a revaluation raises the carrying amount, the gain goes to other comprehensive income and builds a revaluation surplus in equity. The exception is when it reverses an earlier revaluation loss that went through profit or loss. Then the increase goes to profit or loss up to that earlier loss. If a revaluation lowers the carrying amount, the loss goes first against any existing surplus for that asset, and the rest goes to profit or loss.

Intangible assets have no physical form. They must be identifiable: separable from the entity, or arising from contractual or legal rights. Examples are patents, licences, trademarks and customer lists. Identifiable intangibles with a finite life are amortized. Those with an indefinite life are not amortized but are tested for impairment at least annually. Intangibles bought separately are recorded at cost. Internally generated intangibles are different. Research costs are expensed. Development costs are capitalized under IFRS once technical and commercial feasibility criteria are met. Internally generated brands, customer lists and goodwill are not capitalized. Under US GAAP, development costs are generally expensed (software has special rules).

Goodwill is an unidentifiable asset. It cannot be separated from the business. It arises only in a business combination, as the excess of the consideration paid over the fair value of the identifiable net assets acquired. It is not amortized. It is tested for impairment at least annually. Goodwill impairment is never reversed. Impairment of other assets under IFRS can be reversed up to the original carrying amount (less depreciation that would have been charged), except for goodwill. Under US GAAP, reversal of impairment for assets held for use is not allowed.

Key formulas to remember

Goodwill (full or partial): Goodwill = Consideration transferred − Fair value of identifiable net assets acquired (assets − liabilities); Under IFRS with a non-controlling interest, you may use partial goodwill (NCI at its share of net assets) or full goodwill (NCI at fair value). US GAAP uses full goodwill.
Carrying amount: Carrying amount = Cost − Accumulated depreciation (or amortization) − Accumulated impairment losses; Under the revaluation model, start from the latest fair value instead of cost.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Residual value is deducted. The same logic applies to amortization of finite-life intangibles, usually with no residual value.
IFRS impairment test: Impairment loss = Carrying amount − Recoverable amount, if positive. Recoverable amount = higher of (fair value less costs of disposal) and (value in use); Value in use is the present value of expected future cash flows from the asset.
US GAAP impairment test (held for use): Step 1: impaired if carrying amount > undiscounted expected cash flows. Step 2: loss = carrying amount − fair value; Two steps. Impairment losses are not reversed under US GAAP.
Revaluation accounting: Increase: OCI (revaluation surplus), unless reversing a prior loss in profit or loss. Decrease: first against surplus, then profit or loss; Applies under IFRS only.

How to solve Non-Current Assets: PP&E, Intangibles and Goodwill questions

Use this order for any question on PP&E, intangibles or goodwill. Most errors come from skipping the first and last steps.

1Identify the asset type and the framework: IFRS or US GAAP. Check for the word 'revaluation', which signals IFRS.
2Work out the initial cost. Include costs to bring the asset to working condition. Exclude training, admin and general overhead.
3For intangibles, decide if the asset is identifiable, internally generated or acquired. Expense research and internal brands. Capitalize development only if criteria are met (IFRS).
4Compute the carrying amount at the date in question: cost less accumulated depreciation or amortization, adjusted for any revaluation or impairment.
5For a business combination, compute goodwill as consideration less fair value of identifiable net assets. Do not add goodwill already on the target's books.
6For impairment, compare the carrying amount with the recoverable amount (IFRS) or run the two-step test (US GAAP). Take the loss as the difference.
7Place the effect: depreciation and impairment go to profit or loss. Revaluation surplus goes to OCI. Then check the effect on equity, assets and ratios.
8Pick the option that matches your number, and use the direction of the effect (higher or lower) to eliminate the other two.

Quickest way: Carrying amount first, then compare

When to use it: Use this for impairment and revaluation numeric questions when you have about 90 seconds.

Write the carrying amount in one line: cost − accumulated depreciation.
Take the recoverable amount as the higher of the two measures given. If only one is given, use it.
Loss = carrying amount − recoverable amount. If negative, the loss is zero.
For revaluation, gain or loss = fair value − carrying amount. Then decide OCI or profit or loss.
Eliminate options that are on the wrong side of zero or that use the lower of the two recoverable measures.

Common mistakes in Non-Current Assets: PP&E, Intangibles and Goodwill

Amortizing goodwill or indefinite-life intangibles.
Students link all non-current assets to depreciation.
Fix: Remember: goodwill and indefinite-life intangibles are tested for impairment at least annually, not amortized.
Using the lower of fair value less costs of disposal and value in use as recoverable amount.
It looks like the lower of cost or market rule for inventory.
Fix: Recoverable amount is the HIGHER of the two. Management would use or sell the asset, whichever gives more.
Reversing a goodwill impairment loss.
IFRS allows reversals for other assets, so students apply it to goodwill too.
Fix: Goodwill impairment is never reversed under IFRS or US GAAP.
Taking all revaluation gains to profit or loss.
Students assume gains behave like normal income.
Fix: Gains go to OCI as a revaluation surplus, except to the extent they reverse a prior loss recognized in profit or loss.
Capitalizing internally generated goodwill, brands or research costs.
Students think any valuable asset belongs on the balance sheet.
Fix: Only acquired goodwill (from a business combination) is recognized. Expense research costs and internal brands. Development costs qualify under IFRS only if criteria are met.
Forgetting to deduct residual value, or using the wrong carrying amount, before testing impairment.
Students rush and use original cost.
Fix: Always update accumulated depreciation to the test date, then compare.

Worked examples

Example 1

A company buys 80% of a target for €900 million cash. The fair value of the target's identifiable assets is €1,500 million and its liabilities are €600 million. The non-controlling interest is measured at its proportionate share of identifiable net assets (IFRS). What goodwill is recognized? (A) €180 million (B) €540 million (C) €900 million

Show the solution

Identifiable net assets = 1,500 − 600 = €900 million.
NCI at proportionate share = 20% × 900 = €180 million.
Goodwill = consideration + NCI − net identifiable assets = 900 + 180 − 900 = €180 million.
Check: 80% × 900 = 720 is the acquirer's share of net assets. Goodwill = 900 − 720 = €180 million. Consistent.

Answer: (A) €180 million

Example 2

A machine was bought for $500,000 with a 10-year life, no residual value and straight-line depreciation. After 4 years, an impairment test shows fair value less costs of disposal of $240,000 and value in use of $280,000. Under IFRS, what impairment loss is recognized? (A) $20,000 (B) $60,000 (C) $260,000

Show the solution

Annual depreciation = 500,000 ÷ 10 = $50,000.
Accumulated depreciation after 4 years = $200,000.
Carrying amount = 500,000 − 200,000 = $300,000.
Recoverable amount = higher of 240,000 and 280,000 = $280,000.
Impairment loss = 300,000 − 280,000 = $20,000.
Option B uses the lower measure (240,000). Option C uses the wrong base.

Answer: (A) $20,000

Exam tips

Questions often test the contrast between IFRS and US GAAP: revaluation, development costs, impairment reversal and the impairment test. Learn these four pairs.
With three options, compute the carrying amount first. The wrong options are usually traps from using original cost or the lower recoverable measure.
For goodwill questions, check whether the target's existing goodwill is mentioned and whether NCI uses full or partial goodwill.
Conceptual questions ask how a choice affects ratios. Capitalizing raises assets and operating cash flow early, and expensing lowers current profit. Revaluation raises equity and lowers return on equity and asset turnover.

Practice questions from Analyzing Balance Sheets

Non-Current Assets: PP&E, Intangibles and Goodwill: frequently asked questions

What is the difference between identifiable and unidentifiable intangible assets?

An identifiable intangible can be separated from the entity or arises from contractual or legal rights, such as a patent or licence. Goodwill is unidentifiable because it cannot be separated from the business. It is recognized only in an acquisition.

How is goodwill calculated and impaired?

Goodwill is the consideration transferred (plus any non-controlling interest) minus the fair value of identifiable net assets acquired. It is tested for impairment at least annually. Any loss goes to profit or loss and is never reversed.

What is the difference between the cost model and revaluation model under IFRS?

The cost model carries an asset at cost less accumulated depreciation and impairment. The revaluation model carries it at fair value less later depreciation and impairment, applied to a whole class of assets. US GAAP does not permit revaluation for PP&E held for use.

Are development costs capitalized?

Under IFRS, research costs are expensed, and development costs are capitalized once specified criteria such as technical feasibility are met. Under US GAAP, development costs are generally expensed, with special rules for software.