Goodwill and balances GAAP IFRS

Accounting
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What does the value of goodwill on a balance sheet capture (that is, how does a company determine when and at what amount to record the value of goodwill)?

May 11th, 2015

Goodwill is an intangible asset that equals an acquired company's purchase price minus the value of its net assets when it was acquired.

For decades, when a company bought another company, it could use one of two accounting methods: pooling of interest or purchase.

  • When the pooling of interest method is used, the balance sheets of the two businesses are combined and no goodwill is created. When the purchase method is used, the acquiring company will put the premium they paid for the other company on their balance sheet under the "Goodwill" category. Accounting rules require the goodwill be amortized over the course of 40 years.

http://beginnersinvest.about.com/od/analyzingabalancesheet/a/goodwill-on-the-balance-sheet.htm

  • A company may only record goodwill on its balance sheet in connection to a business or business segment it acquired.

  • Goodwill = acquisition price - net assets.

  • Goodwill is not amortized, but it can be impaired if the present value of the future revenues of the related business segment are less than the net assets (including goodwill) of the business segment.

  • Goodwill is not amortized, but it can be impaired if the present value of the future revenues of the related business segment are less than the net assets (including goodwill) of the business segment.

  • Before 2001, companies could choose between the pooling or purchase methods when accounting for business combinations.  It is now mandatory for firms to use purchase accounting.  (FASB)

    Under pooling, firms would just record the BOOK VALUE of the equity of the acquired company, regardless of the purchase price (fair market value).  As a result, no goodwill was created under the pooling method.  The purchase method, however, does lead to a recording of the acquisition at the FAIR MARKET VALUE. 

  • Recording Goodwill – SFAS 142 Issued June 2001

    Big takeaway:  Don’t amortize goodwill.  Test annually for impairment & if impaired write-down goodwill and record loss on impairment.

  • ref 

  • https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/controlling-and-reporting-of-intangible-assets-7/types-of-intangible-assets-51/goodwill-263-707/


May 11th, 2015

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May 11th, 2015
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May 11th, 2015
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