FAR 31.205-49—Goodwill.
Plain-English Summary
FAR 31.205-49 addresses goodwill, which is an unidentifiable intangible asset that can arise when a business is acquired for more than the fair value of its identifiable assets minus liabilities assumed. The section explains what goodwill is, how it is created under the purchase method of accounting in a business combination, and that it may result from acquiring an entire company or only a portion of one. Its central purpose is to make clear that the Government will not reimburse contractors for costs associated with goodwill, including amortization, expensing, write-offs, or write-downs, regardless of how those charges are labeled or presented in the contractor’s accounting records. In practice, this means contractors must separate acquisition-related accounting treatment from allowable contract cost treatment and ensure goodwill charges are excluded from indirect rates, proposals, and incurred cost submissions. For contracting officers and auditors, the rule provides a straightforward basis for disallowing goodwill-related charges that may otherwise be embedded in corporate overhead, restructuring, or acquisition accounting entries.
Key Rules
Goodwill is an unidentifiable asset
Goodwill is not a separately identifiable tangible or intangible asset. It represents the excess purchase price paid in a business combination over the fair value of identifiable assets acquired minus liabilities assumed.
Created under purchase accounting
The section ties goodwill to the purchase method of accounting for business combinations. It may arise when a contractor acquires a whole business or only a portion of one, so the rule applies broadly to acquisition transactions.
All goodwill charges are unallowable
Any cost for amortization, expensing, write-off, or write-down of goodwill is unallowable. The prohibition applies regardless of the accounting label used or how the charge is represented in the books.
Form does not change allowability
Contractors cannot make goodwill costs allowable by reclassifying them as another type of expense. If the underlying charge is for goodwill, it remains unallowable even if embedded in other accounts or allocations.
Responsibilities
Contractor
Identify goodwill arising from acquisitions and exclude all related amortization, write-off, write-down, or similar charges from costs claimed on Government contracts. Ensure accounting systems, indirect rate calculations, and incurred cost submissions do not include goodwill costs.
Contracting Officer
Review claimed costs and reject or disallow goodwill-related charges when they appear in proposals, invoices, indirect pools, or final cost submissions. Ensure contract pricing and cost allowability determinations follow the FAR prohibition.
Auditor/Defense Contract Audit Agency (or equivalent audit function)
Examine contractor records for goodwill charges that may be embedded in overhead, restructuring, or acquisition-related accounts and identify them as unallowable during audits and incurred cost reviews.
Agency
Apply the FAR cost principle consistently in evaluating contractor submissions and in resolving disputes over whether a charge is a goodwill cost or another allowable business expense.
Practical Implications
Contractors must strip goodwill charges out of any cost build-up before billing the Government or proposing indirect rates.
Goodwill often appears after mergers or acquisitions, so post-acquisition accounting entries should be reviewed carefully to avoid spreading unallowable costs into overhead pools.
A common pitfall is treating goodwill amortization as a normal corporate expense; under this rule, it is still unallowable even if required by financial accounting treatment.
Another risk is mislabeling goodwill-related write-downs as impairment, restructuring, or asset adjustment costs; the underlying substance controls, not the account name.
Contracting officers and auditors should look for acquisition-related journal entries and corporate-level allocations that may indirectly include goodwill costs.
Official Regulatory Text
Goodwill, an unidentifiable intangible asset, originates under the purchase method of accounting for a business combination when the price paid by the acquiring company exceeds the sum of the identifiable individual assets acquired less liabilities assumed, based upon their fair values. The excess is commonly referred to as goodwill. Goodwill may arise from the acquisition of a company as a whole or a portion thereof. Any costs for amortization, expensing, write-off, or write-down of goodwill (however represented) are unallowable.