How is goodwill typically accounted for in a company's financial statements?

Goodwill is an intangible asset that arises when a company acquires another business for a price greater than the fair value of its identifiable net assets. It reflects factors such as brand strength, customer relationships, and employee expertise that are not separately identifiable and quantifiable.

The correct accounting treatment for goodwill involves periodic testing for impairment rather than depreciation or a specific routine adjustment. If the carrying value of goodwill exceeds its fair value due to factors like underperformance of the acquired entity, an impairment charge is recorded, which reduces the goodwill on the balance sheet and subsequently affects net income.

In the context of acquisitions, the goodwill is initially recognized at acquisition but may be adjusted only if an impairment is identified. This makes the notion of impairment adjustment vital to understanding how goodwill should be accurately represented on financial statements.

The other options do not correctly capture the nature of goodwill accounting. Goodwill is not treated as a physical asset; it is intangible. It isn't reduced simply upon being sold, as it remains on the balance sheet until an impairment occurs. Finally, goodwill is not subject to regular depreciation like tangible assets but must instead be evaluated for possible impairment at least annually.