Which valuation method does UK GAAP require for goodwill?

UK GAAP requires goodwill to be amortized over a period, typically not exceeding 10 years, in line with the provisions of the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102). This approach reflects the consumption of the economic benefits associated with the acquired goodwill over its useful life.

The rationale behind amortizing goodwill stems from the desire to systematically allocate the cost of the acquired goodwill as an expense over its useful life rather than reflecting it as an indefinite asset. This ensures that financial statements accurately represent the company’s financial position over time, aligning the expense recognition with the revenues generated from the acquired business.

While goodwill can be tested for impairment under certain conditions, the required periodic amortization means that after a certain number of years, the goodwill may be fully written off unless further impairment is recognized before the end of its amortization period.