What characterizes goodwill under US GAAP?

• A. Goodwill is only recognized if the subsidiary is 100% acquired
• B. Goodwill equals the fair value of the subsidiary minus the fair value of net assets
• C. Goodwill is tested for impairment quarterly only
• D. Goodwill is amortized over its useful life

Answer: (B)

Goodwill, under US GAAP, is defined as the excess of the purchase price paid for a business over the fair value of its identifiable net assets at the acquisition date. This means that when a company acquires another company, goodwill arises when the purchase price exceeds the fair value of identified tangible and intangible assets, minus liabilities assumed. Therefore, the correct characterization of goodwill is that it equals the fair value of the subsidiary's net assets acquired minus the total fair value of the identifiable net assets at the acquisition date.

This concept is rooted in the idea that goodwill represents the value derived from factors like reputation, customer loyalty, and other intangible assets that are not separately identifiable, which contribute to the earning potential of the acquired business.

The other choices present concepts that do not align with the definition or accounting treatment of goodwill under US GAAP. For example, goodwill does not need to be based on a 100% acquisition, it is tested for impairment at least annually rather than quarterly, and it is not amortized over its useful life; instead, it is subjected to an impairment test to determine if its carrying value exceeds its fair value.