...| Goodwill | Research paper | | | ACC 620 - Advance entities Contents: Introduction 2 Accounting standards of goodwill development 3 Affection on SFAS 141 and SFAS 142 4 The definition of goodwill 4 Contribution to the creation of goodwill 5 Goodwill inclusion and exclusion 6 Identification of goodwill and intangible assets 7 Calculation of goodwill 7 Goodwill impairment 10 Comparison IFRS with U.S. GAAP for goodwill 11 Conclusion 13 References 14 Introduction: When one company gains control over the others, a business combination is established. As a part of this process, reciprocal accounts and intra-entity transactions must be adjusted or eliminated to ensure that all reported balances truly represent the single entity and current financial reporting standards require the acquisition method to account for business combinations. However, in many cases, the parent records both the consideration transferred and the individual amount of the identified assets acquired and liabilities assumed at their acquisition-date fair values are difference. Thus, GAAP requires the acquirer recognizes the asset goodwill as the excess of the consideration transferred over the collective fair values of the net identified assets acquired and liabilities assumed. Nevertheless, in a business combination, assets of the purchase price and book value of assets varies greatly. Such as the 1989 Time and Warner merged the two companies...
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...Goodwill Everyday companies are purchased and sold, mergers take place, and partnerships are formed all over the world. Once the purchaser and the seller have come to an agreement on a price or the merging companies come to an agreement, accounting needs to have a way to account for the difference between the tangible assets and the sales price and that is where goodwill comes into play. In a business combination, goodwill is measured as the difference between the price paid for an acquired company and the sum of the fair value of the identifiable net assets. In other words, goodwill is a residual asset, the amount remaining after fair values have been attached to the identifiable assets and liabilities of the purchased or merged company. The measurement of goodwill can also be described as having mixed attributes: it is a residually calculated amount derived both from assets and liabilities that are measured at fair value and others that are not measured at fair value. Since it is hard to place an exact value on a reputation of a brand or company, or to know how much revenue will be made after a business combination, estimates are made as to future profits. Goodwill may be an intangible asset but that doesn’t mean that it is not a saleable asset, plus in most cases goodwill is almost indestructible. One of the only ways to destruct goodwill is by indiscretion. Goodwill is typically built painstakingly over years of doing business. Some of the general ways to generate...
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...Goodwill Valuation and Impairment Goodwill can be found on the balance sheet of many companies whether it is a publically traded or a privately owned company. In simple terms, goodwill is the result of one company obtaining another. In accounting, goodwill is identified as an asset that has future economic benefits, which results from the acquisition of another company’s assets (FASB ASC 350-20-20). This account is shown on the balance sheet of the acquiring company. The excess of purchase price less the book value of the company represents goodwill. The purchase price is also known as the fair value. In other terms, book value is also known as carrying value, which is the book value minus any accumulated impairment amounts. If the acquiring company pays more than the carrying value, there is a premium. Premium is defined as the additional amount that is paid in excess of the ordinary price, similar to the idea of a premium bond. In order to provide consistent and comparable information about goodwill, the Financial Accounting Standards Board (FASB) has established Generally Accepted Accounting Standards (GAAP) that are used to measure and valuate the impairment of goodwill for companies operating their businesses in the US. Also the International Accounting Standards Board (ISAB) has established international standards known as IFRS. Both the FASB and the ISAB have created accounting standards to help companies determine the valuation and impairment of goodwill. Goodwill...
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...What is goodwill? As explained by Investopedia, goodwill is looked at as an ethereal asset on the balance sheet for it is not a physical asset like equipment and buildings. Generally, goodwill represents the value of intangible assets like good customer relations, strong brand name, good employee relations, and any kind of patents or proprietary technology. Goodwill generally arises at the time of one company being purchased by another. Goodwill is, therefore, something which cannot be described easily but in general refers to good name, reputation, and wide ranging business connections which are helpful for the business in gaining more profits than what could have been otherwise earned. Moreover, goodwill is an attractive force aiming at bringing back the customers to old place of business. Methods to evaluate goodwill The methods used for valuation of goodwill of a firm are mentioned below: * Average profit method This method of goodwill valuation takes the average profit of previous years as its basis. This average profit is multiplied by the number of purchases made in that year. Goodwill = Average Profit x Number of Purchases in the year * Weighted average profit method This method of goodwill evaluation can be explained as a modified side of the he average profit method. This method involves the relevant number of weights, i.e. 1, 2, 3, 4 multiples profit of each year so as to find out value product. The total of products is thereafter divided by the total...
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...Goodwill has long been a controversial subject. Wines and Ferguson (1993) and McCarthy and Schneider (1995) documented the fact that the controversy regarding the accounting for goodwill in US and abroad had existed since the early 1900s. The controversy focused on the recognition of goodwill as an asset, on its treatment and its link to the income statement. A search of the accounting literature yields two definitions of goodwill. One is that goodwill is the excess of purchase price over fair value of the net assets acquired. Alternatively, goodwill is defined as the price paid for excess earnings where excess earnings are defined as the difference between the earnings of the acquired asset over the normal earnings for a similar business. Historically, there are three views on the treatment of goodwill. The first suggests that goodwill should be written off immediately against retained earnings. The second view holds that goodwill is a wasting asset and it should be amortized over a useful life. Further, the amount of goodwill amortized should be allocated to periods where it contributes to company’s earnings. Goodwill arises is calculated as the difference between the value of the business as a whole and the aggregate of the fair values of its various identifiable assets both tangible and intangible. As outlined in Financial Accounting Standards Board Accounting Standards Codification 350: Intangibles - Goodwill and Other (formerly Statement of Financial...
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...In the practical sense, when selling a business, goodwill is all the hard work and effort the seller has put into the business over the years. When acquiring a business, goodwill is the difference between the tangible assets and the purchase price.Goodwill value should not be confused with going-concern value. There is a big difference. One leading business appraiser has defined going-concern value as, "The premise that a business will continue to operate consistent with its intended purpose as opposed to being liquidated." In other words, the value of a business for just being in business is the going-concern value. It has nothing to do with whether the business is profitable, "on its last legs," or merely breaking even. Essentially, if the doors are open, a business is a going concern.Most business owners view goodwill as good service, products and reputation. One dictionary defines Goodwill as, "A desire for the well-being of others; the pleasant feeling or relationship between a business and its customers." What goodwill is and how it is represented on a company's financial statements are two different issues. For example: until recently, if a company sold for $5 million, but only had $1 million in tangible assets, the balance of $4 million was considered goodwill. Under previous accounting standards, this goodwill had to be amortized by the acquirer over a 15-year period. This especially affected public companies, since an acquisition...
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...In accounting, goodwill is an intangible asset associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of 1) the fair value of the identifiable tangible and intangible assets acquired, and 2) the liabilities that were assumed. Goodwill is reported on the balance sheet as a noncurrent asset. Since 2001, U.S. companies are no longer required to amortize the recorded amount of goodwill. However, the amount of goodwill is subject to a goodwill impairment test at least once per year. Outside of accounting, goodwill could refer to some value that has been developed within a company as a result of delivering amazing customer service, unique management, teamwork, etc. This goodwill, which is unrelated to a business combination, is not recorded or reported on the company's balance sheet.In accounting, goodwill is an intangible asset associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of 1) the fair value of the identifiable tangible and intangible assets acquired, and 2) the liabilities that were assumed. Goodwill is reported on the balance sheet as a noncurrent asset. Since 2001, U.S. companies are no longer required to amortize the recorded amount of goodwill. However, the amount of goodwill is subject to a goodwill impairment test at least...
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...Goodwill is an intangible asset described differently amongst different professionals in history. Professor Dicksee, author of many different accounting manuals has defined goodwill as “When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” Lord Lindley has been quoted of saying “The term goodwill is generally used to denote benefit arising from connections and reputation.” Lord Macnaghten has been quoted of saying “Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.” When a potential buyer is considering whether or not to acquire a company, that buyer may want to calculate the average future income when deciding what purchase price to offer. Goodwill is usually the payment that would be contributed above the future normal expected profits. Expected future income is further known as the normal income, the appropriate rate of return on assets times the fair value of the gross assets of the acquired company. There are six different methods used in the valuation of goodwill of a firm. 1. Average Profit Method calculates goodwill on the basis of the average profit previous years. The average profit...
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...ABACUS, Vol. 45, No. 3, 2009 doi: 10.1111/j.1467-6281.2009.00295.x MARTIN BLOOM Accounting For Goodwill abac_295 379..389 This article provides a means of resolving one of accounting’s ongoing problems—how to account for goodwill in an era where the unidentifiable intangible asset is often an entity’s largest value component. Despite the general recognition that, in practice, the two classes of goodwill are indistinguishable in terms of their ability to generate streams of revenue, a distinction is traditionally drawn between internally generated and purchased goodwill. The former should not be brought to account because it is impossible to do so within the accepted rules of double entry bookkeeping and historical cost based accounting. On the other hand, there is no difficulty in bringing purchased goodwill to account, but controversy has always existed as to how to treat the amount once recognized. It can confidently be expected that, as anomalies and practical difficulties manifest themselves in practice, the current impairment regime will, in its turn, be abandoned. Key words: Accounting; Double account; Goodwill, internally generated, purchased. Controversy on how to account for goodwill has continued over many decades. It is certainly an example of Sterling’s (1975) lament that because of the way we conceive of issues ‘accountants do not resolve issues, we abandon them’ (quoted in Chambers, 1995). The ideas proposed here are based on redefining the problem. They...
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...one reporting unit. When performing step one of the Goodwill Impairment Testing we will consider two separate reporting units. The first reporting unit is the business component Medical-Surgical. Step one involves comparing the carrying value (including goodwill) with the fair value of the reporting unit. Carrying Value without Goodwill Carrying Value of Goodwill Total Carrying Value including Goodwill $118,800,000 3,200,000 $122,000,000 Fair Value Difference Carrying Value including Goodwill $125,000,000 FV > CV by $3,000,000 $122,000,000 When we compare this value with the Fair Value we see that the Fair Value is higher by $3,000,000. This means that Goodwill is not impaired and no further steps need to be taken. Now to compare the second reporting unit, DDC Distribution and HC Holding that are aggregated. We must first find the total carrying value, including Goodwill, of the two components. Value/Amount DDC Distribution HC Holdings Total Carrying Value of Net Assets (w/o Goodwill) $231,700,000 $72,250,000 $303,950,000 Carrying Value of Goodwill $10,500,000 $2,150,000 $12,650,000 Total Carrying Value including Goodwill $242,200,000 $74,400,000 $316,600,000 Now we follow step one and compare the carry value to fair value. Fair Value Difference Carrying Value including Goodwill $236,000,000 + 75,000,000 = $311,000,000 FV < CV by $5,600,000 $316,600,000 The second reporting unit has a goodwill impairment that must be computed and recorded. We must...
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...Learning Team Reflection Week 2 My concerns are for the equations for the three different methods of depreciation and the accumulated depletion method. I want to understand the math of how all are calculated and how they are presented on the balance sheet statement, income statement, and understand the journaling of the different accounts. The different methods that I am referring to are: straight-line, units-of-activity, and the declining-balance. In the practice of answering the questions I feel rather good with most of the terminology, definitions, and how they are applied. I would feel better going through an example of each type. With continued practice problems things will turnout better as we progress in class. Homework was not a joy this week; the examples were not clear and very confusing. After reading the chapters things were still unclear. Home work will be and attempt at best. But I look forward to week three with open curiosity. The concerns that I have are the same. I’m having a difficult time understanding the percentage of depreciation as well as the knowledge of understanding the formula. While attempting to give the correct answer to this week exercise, I’m having trouble. Please review this exercise with much clarity. I really enjoy learning the concepts of plant assets. The problem solving for calculating the land, including sales tax, attorney fees, broker fees, and insurance was very helpful. This really helps with knowing the basis of accounting...
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...Other intangible assets may be so amortized and deducted from earnings in the determination of income tax liability. Even in the simplest of times, thus, a firm can attain income tax savings to the extent that it can successfully classify intangible assets as something other than goodwill. Thus, it is entirely possible that the GEC Ltd. auditors reclassified some portion of the goodwill account of AEI Ltd. to some other form of intangible asset, and then effected further adjustments to reclassify some of that amount from an asset to an expense. The issue of accounting for intangible assets has expanded in several directions. One of these directions concerns branded products. Some firms claim that the establishment of brands creates an intangible value for a company, and that such value should be able to be amortized for tax purposes. In turn, some auditors (both private and governmental) contend that the value of a brand is a form of goodwill, and as such may not be amortized and deducted from income taxes. In the traditional conception of goodwill, the claim is that a brand has no recordable value until it is sold, and that when it is sold it reflects goodwill that is neither amortizable nor tax deductible. Many firms contend, however, that brands have a current and intangible value. Thus, it is also within the realm of possibility that GEC Ltd. judged that some brand owned by AEI Ltd. possessed an intangible value that could be amortized and deducted. Accounting For Research...
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...Memo TO: Professor Brown FROM: Carissa Lambert DATE: April 6, 2015 SUBJECT: Case 11-9 Goodwill Impairment I think that Galaxy management should have performed an interim goodwill step 1 impairment test. Although it was not required, I think it could have been beneficial considering the declines of the past few quarters. They did review ASC 350 and determined that the test was not necessary. If they reviewed ASC 350 then we might assume that they performed a qualitative assessment of the factors listed in 350-20-35-3C (a) through (g). In the first three quarters of 2012, management explained the decline in earnings due to “continued slowing economy and reduced consumer spending.” Deterioration in economic conditions and a decline in earnings compared to expectations are both factors that can cause a drop in the fair value of the reporting units. Galaxy also experienced a sustained decline in their share prices for those three quarters. They had stock prices of $56.75 in 2011 that then dropped each quarter and was down to $25.25 by the third quarter of 2012. If after these factors are considered and management determines that it is not likely that the fair value is less than the carrying value then step 1 and step 2 of the test are unnecessary. Considering that Galaxy management did not perform the interim step 1 test, I would assume that they came to the determination that fair value would not have dropped to less than carrying value. According to the FASB standards this...
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...The Impairment of Goodwill As regulated by U.S. GAAP & IFRS By Russell Wickham Franklin University Dr. Thomas Hrubec The Impairment of Goodwill As Regulated by U.S. GAAP & IFRS Introduction Goodwill is an intangible asset that usually arises from the acquisition of a business. When the purchase price is determined, the difference between the purchase price and the fair market value of the net assets, i.e. fair market value of the assets minus the fair market value of the liabilities assumed, is said to be the goodwill attributable to that business. Unlike other assets, both tangible and intangible, goodwill is not said to have a determinable useful life and thusly is not amortized over time and expensed accordingly (FASB 350-20-55, 2010). To understand how the value of goodwill is determined and thusly impaired, three main points about goodwill must be made. The first is that unlike other assets, goodwill is a residual asset. That means that its fair market value is determined after the fair market value of all other assets is determined. As mentioned above the difference between the value, i.e. fair market or purchase price, and the net value of all other assets is the value of goodwill. The second is that expenses that create goodwill are not easily attributable to a specific amount of goodwill and likewise the cash flows or revenues attributable to goodwill are not easily determined (FASB 350-20, 2010). Thirdly, the goodwill cannot be separated from the business...
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...IMPAIRMENT Depreciation, depletion, and amortization reflect a gradual consumption of the benefits inherent in an operational asset. An implicit assumption in allocating the cost of an asset over its useful life is that there has been no significant reduction in the anticipated total benefits or service potential of the asset. Situations can arise, however, that cause a significant decline or impairment of those benefits or service potentials. An extreme case would be the destruction of a plant asset—say a building destroyed by fire—before the asset is fully depreciated. The remaining carrying value of the asset in that case should be written off as a loss. Sometimes, though, the impairment of future value is subtler. The way we recognize and measure an impairment loss differs depending on whether the operational assets are to be held and used or are being held to be sold. Accounting is different, too, for operational assets with finite lives and those with indefinite lives. We consider those differences now. Operational Assets to Be Held and Used An increasingly common occurrence in practice is the partial write-down of operational assets that remain in use. For example, in the second quarter of 2001, American Airlines reduced the carrying value (book value) of certain aircraft by $685 million. The write-down reflected the significant reduction in demand for air travel that occurred even before the September 11, 2001, terrorist attacks on the World Trade Center and...
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