...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...
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...Accounting for Goodwill Under IFRS 3 In this essay I will be discussing the underlying problems with accounting for goodwill as a result of business combinations, which will include the comparison between the requirements of FRS 10 and IFRS 3 and also how this International standard affects the preparers and shareholders. IFRS 3 defines goodwill as: “future economic benefits arising from assets that are not capable of being individually identified and separately recognised”. The definition effectively confirms that the value of the business overall is more than the sum of the accountable and identifiable net assets. Goodwill can occur either internally or as a result of business acquisition that therefore results in purchased goodwill. It is relevant to note here that self generated goodwill is not recognised as an asset under IAS 38 as it would allow such companies to have unfair advantage by valuing their own assets and thus producing more favorable balance sheet. Where as the purchased goodwill is recognised as it has an identifiable “cost”, being the difference between the fair value of the total consideration for the business and the fair value of all the other accountable and identifiable net assets. This difference can be attributed to factors such as business reputation, managerial ability, an established customer base and so on. The treatment of goodwill differs between UK GAAP and IFRS in a number of respects, both regarding the initial measurement of goodwill and its subsequent...
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...| 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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...Memorandum to the File Date: September 15, 2015 From: Juanita Quiroz Re: Accounting treatment for the trademark and goodwill Facts Express Dry-Cleaning purchased Deluxe Dry-Cleaning. In the purchase, Express acquired a trademark with a current remaining useful life of five years. The trademark is renewable every ten years, and Express plans to continuously renew it. The annual impairment test shows the net assets (i.e. the carrying amount) of this reporting unit are $4,000,000, which includes intangible assets of $2,200,000, a trademark of $400,000, and goodwill of $1,400,000. The fair value of the reporting unit is considered to be $3,400,000, which includes tangible assets of $2,200,000, the trademark valued at $300,000, and internally developed, unrecognizable intangible patent valued at $100,000. Express expects the division to generate profits in years to follow. Issues 1) Should Express amortize the trademark? 2) Should impairment losses be recorded for the trademark and the goodwill? 3) Determine the implied value of goodwill. Conclusion Express Dry-Cleaning should not amortize the trademark. In order for the trademark to be amortized; it would need a finite useful life. (FASB ASC 350-30-35-1) The useful life of the trademark is considered to be indefinite because Express plans on renewing it and cash flows are expected to continue indefinitely. (FASB ASC 350-30-35-4) Impairment is defined by the FASB Accounting Standards Codification as occurring when the...
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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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...Goodwill is an extremely interesting business phenomenon. It enables a firm to derive competitive advantage because of issues like reputation, stability, technical excellence, perceived quality and other intangibles, and thereby allows it to earn higher profits, than it would otherwise have, by selling its products or assets. While the need for valuation or accounting of goodwill does not arise in the normal course of a business or in its growth on a periodic basis, (because of the absence of physical assets to back it up), it becomes an extremely important aspect when a running business goes up for sale, or changes ownership, through mechanisms like mergers, or acquisitions. Goodwill can be considered from two different points of view: an economic and an accounting approach. The economic approach regards goodwill as the present value of the additional profits the acquiring company is expecting to gain in the future resulting from the acquisition. These additional profits arise from a “favourable attitude towards the firm” and from synergies. From an accounting perspective, goodwill is the difference in valuation between the purchase price and the book value of the acquired firm. (Lycklama, 2006) The dilemma faced by accountants in valuing goodwill is best illustrated by the sign Albert Einstein had in his Princeton office that stated, “Not everything that counts can be counted, and not everything that can be counted counts.” (Bullen and Cafini, 2006) Businesses with strong...
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...WHAT IS GOODWILL? The main method used by businesses to classify assets is to split them into tangible assets, which have a separate existence from the business (examples of which would include buildings, land and machinery), and intangibles which do not. Some clear examples of intangibles include goodwill, patents, research and development expenditure and trademarks. Intangible assets are usually created within the organisation over a period of time, by the company itself, rather than acquired from an external source and are rarely sold off individually they can normally only be sold in conjunction with associated tangible assets. Robins, in his essay "FRS 10: Goodwill and Intangible Assets" identifies three sources of goodwill within a business. He states these as: 1. Expertise of the workforce: Current accounting practices do not allow for the inclusion of knowledge or business acumen to be included within the balance sheet. In this way there is no allowance for the expertise of the workforce or the value of human resources to be recorded as an asset on the balance sheet. 2. The reputation of the product(s) of the business: Often, if the product has a household name attached, which generate positive connotations then sales and profits will be "boosted" on the basis of that reputation. 3. The general economic environment: Current levels of interest and exchange rates as well as levels of investor confidence generally will have a major influence on the value...
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...Client Understanding I am excited to be working with your organization to improve the financial practices. After reviewing the firm’s financial records there are a few additional items needed to complete the accounting evaluations. The additional items being requested are adjusting lower cost of market inventory, recording gain or loss on assets, adjusting goodwill and capitalizing interest on building construction. I understand the firm is concern with why the additional information is being requested. Each requested item will be discussed in detail to ensure the organization understands how these accounting practices will improve the entire firm. Adjusting lower cost of market inventory on valuation Originally the lower of cost or market (LCM) method, was defined by reporting only downward adjustments in the value of temporary investments (Schroeder, Clark, & Cathey, 2011). Ending inventory is stated as the historical cost, which can be higher than the cost of replenishing inventory. The higher historical cost will be reported on the balance sheet. In this case the cost is reported as the current market value (Elmaleh, 2007). This concept is relevant because the higher cost is reported as a loss and a decrease in the cost of goods sold. Selling inventory will require the firm to record several transactions that will create cost and adjusting entries. “GAAP requires that inventory must be carried on the books and reflected on the balance sheet at the lower of cost or...
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...INTERMEDIATE (FINANCIAL) ACCOUNTING I SUBCLASS KLM CASE ANALYSIS QUESTIONS CASE 1 – REVENUE RECOGNITION AND EARNINGS MANAGEMENT INTERMEDIATE (FINANCIAL) ACCOUNTING I SUBCLASS KLM CASE ANALYSIS QUESTIONS CASE 2 – REVENUE RECOGNITION FOR A CONSTRUCTION PROJECT HKU Technology Inc. (Hereafter, HKU Tech) is a large construction contracting firm that serves a variety of industrial customers that purchase machinery and equipment from HKU Tech. HKU Tech’s business primarily involves the design and manufacture of large, industrial machinery and tooling that is used by its customers in manufacturing parts and components for fighter jets, transport planes, and other aerospace-related machinery and equipment. All of HKU Tech’s construction contracts involve the design, development, and manufacture of machines that are unique and customized to the specifications of its customers. HKU Tech negotiates all its contracts with its customers on either a fixed-price or cost-plus basis. HKU Tech has developed an accounting policy to recognize revenue related to its customized construction contracts, which is outlined as follows: The Company performs under a variety of contracts, some of which provide for reimbursement of cost plus fees, and others that are fixed-price-type contracts. Revenues and fees on these contracts are primarily recognized on a contract-by-contract basis using the percentage-ofcompletion method of accounting, which is most often based on contract costs incurred to date compared...
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...Dear Mr. Isaacs: Below are the two proper accounting treatments regarding tangible assets and goodwill as well as the effects of these treatments. Impairment exists when the carrying amount of an asset exceeds its fair value and the impairment loss is the difference between the carrying value and fair value of that asset. The impairment test rules applied to impairment of property, plant, and equipment are different from those used in measuring goodwill. For tangible assets to be held and used, a recoverability test is performed when possible impairment exists, to determine whether an impairment has occurred. The first step of the test is to estimate the future net cash flow expected from the use of that asset and its eventual disposition. If the future cash flow is less than the carrying amount of the asset, the asset is impaired. Conversely, if the future net cash flow is equal to or greater than the carrying amount of the asset, no impairment has occurred. For example, if an asset has a carrying value of $600,000, and the future net cash flow from using and disposing this asset is to be $650,000, therefore, no impairment has occurred. However, if the future net cash flow is less than the carrying amount of the asset, it’s only $550,000, there is an impairment loss, which is the amount the carrying value of the asset exceeds the asset’s fair value. In the example, if the fair value of that asset is $500,000, the impairment loss would be $100,000 ($600,000-$500,000). What...
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...Introduction A study conducted by an independent accounting firm revealed that intangible assets account for 80% of the S&P 500’s total value (Nearon, 2008). This study researched United States (US) companies’ and indicated 40% of market value is not reflected in their balance sheet (Nearon, 2008). This decline in market value has led to strong arguments for rethinking the measurement and treatment for intangibles assets. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) have created significant differences in the accounting treatment of intangible assets. Both IFRS and GAAP view intangible assets as a non-monetary asset that do not have physical substance but can be identified. This paper will review the similarities and differences within GAAP and IFRS regarding the following: intangible asset impairments, research and development (R&D), advertising cost, and goodwill impairment. Intangible Asset Impairment Testing IFRS and GAAP contain similar indicators for testing impairment of intangible assets. Differences arise in testing, recognition and presentation. GAAP requires a two-step impairment test for intangible assets. Step one requires companies to determine if the carrying amount of the assets exceeds undiscounted future cash flows. If it meets this requirement, step two can be used to calculate the necessary impairment loss. An impairment loss is measured as the difference between the carrying amount...
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...FASB that is tasked with proposing amendments to GAAP that would apply only to private (non-public companies). #1) According to the Accounting Standards Update 2014-18, Business Combinations (Topic 805), private companies should no longer “recognize separately from goodwill (1) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business and (2) noncompetition agreements.” This will cut down the complexity and cost while still providing interested parties with information to make decisions off of. #2 As we saw near the end of Chapter 1, the annual testing for impairment of indefinite life intangibles (such as goodwill) is VERY complicated (very quantitative) and time consuming. A few years ago, the FASB provided a ”qualitative” alternative to the annual impairment test. Briefly describe that alternative and what document was issued that allowed that alternative? #2) This amendment allows companies use a qualitative measurement of goodwill to determine whether or not it is necessary to perform a quantitative impairment test. The document issued pertaining to this is the Accounting Standards Update No. 2012-02—Intangibles—Goodwill and Other (Topic 350). #3 Slide #75 in the Chapter 1 slides discusses the accounting for a “bargain purchase” of another company. What is the paragraph in the FASB Codification that...
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...are combined retroactively. With the purchase method, the assets and liabilities of the acquired firm are adjusted to fair value; its reacquisition revenues and expenses are excluded from the combined income statement .In effect, the acquiree's books as of the date of the business combination are treated as if it were the end of its fiscal year, even though it may not be .For pooling accounting, however, the combinee's results of operations prior to the date of acquisition are included in the combiner’s results of operations as if the combination took place at the beginning of the year. The future earnings of pooling companies tend to be higher than those of purchase companies, primarily because of additional depreciation and goodwill amortization. Because of the possibility of abuse, the APB placed tight restrictions on the use of the pooling method by requiring compliance with twelve criteria. Perhaps the most important (and difficult) of these requires that a company exchange a portion of its shares for at least 90 percent of the voting stock of the other company. If any of the twelve criteria are not met, the business combination must be accounted for as a purchase. It is believed that under purchase accounting , the investment by the holding company contributes to group profits only after the combination whereas under the pooling-of-interests method , all the pre-combination profits are...
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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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...Assignment 1: Business Combinations Cindy Yoon Professor Robert Neely ACC 401 – Advanced Accounting October 24, 2013 Abstract In this paper, I will provide an explanation for the business combination method I selected in expanding the corporation by acquiring another firm, the reason for selecting that business combination method, and how the purchase will grow the business. I will also analyze the accounting requirements for the business combination method I selected and how I determined goodwill was impaired and the financial impact of such impaired goodwill. The business combination method I selected is the acquisition method. Business combinations have implemented the newly created accounting treatment called the “acquisition method.” The major changes in the acquisition method include changes to fair value measurement, goodwill recognition, and non-controlling interests. In acquisition method, the parent company reports the net assets of the acquired company at the price that it was paid for. This price includes any cash payment, the fair market value of any shares issued, and the present value of any promises to pay cash in the future. A key point of the purchase method is that the parent consolidates the book value of all the subsidiary’s assets and liabilities and then the fair value, broken down between Net Book Value and Fair Market Value increments, of the subsidiary's assets and liabilities are added to the parent's own assets and liabilities...
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