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Question 2

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Question 2:

Accounting for Goodwill has been a contentious issue for many years.
a. Using examples, explain alternative accounting methods that can be used in practice with respect to the treatment of goodwill arising on consolidation.
b. Discuss the advantages and disadvantages of allowing different treatments to be used under international accounting standards for items such as goodwill.

Answer.

Goodwill means an intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company (www.investorwords.com). There are two types of goodwill, one is internally generated goodwill and another one is external or purchased goodwill.

Internally generated goodwill is supposed to reflect the reputation and other positive characteristics of the business which are all difficult to put a value on (www.staffs.ac.uk). Internally generated goodwill is based on the value of a business as a whole and the value of its net assets. Because of internal goodwill has not been paid and it does not have an ‘objective’ value, and goodwill changes every day, internally generated goodwill should not appear on the Balance Sheet. Purchased goodwill is the excess of purchase price over fair value of the net assets of the business acquired by the purchaser. Purchased goodwill is based on transaction with third party at arm’s length. It is recognized by the acquirer as asset from the acquisition date.

Accounting standards allow two methods of calculating goodwill: The proportionate (traditional) method and the fair value method. Goodwill is the amount paid by the parent for the subsidiary differs from the value of the separable net assets acquired

The old

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