Essay On Goodwill
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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.
Robins, in his essay "FRS 10: Goodwill and Intangible Assets" identifies three sources of goodwill within a business.
He states these
as:ACCT 31600 Accounting Theories and Practice
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 of businesses and will therefore also affect the amount of goodwill attached to a business at any one time.
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 of businesses and will therefore also affect the amount of goodwill attached to a business at any one time.
you are also suggested:AFIN 252 Applied Financial Analysis And Management
Accounting for goodwill within the balance sheet has now been considered to be one of the most controversial aspects of financial reporting as there is no provision within the balance sheet for non-purchased goodwill.
ACCOUNTING FOR GOODWILL
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. Prior to the introduction of FRS10, its predecessor SSAP 22 prohibited any accounting entries in respect of non-purchased goodwill - and for purchased goodwill, allowed two methods.
Writing off goodwill immediately to reserves. Under this method, goodwill would never be shown as an asset in the balance sheet
Carry goodwill as an intangible fixed asset, to be amortised over its estimated useful life. It was not allowable to carry goodwill at cost indefinitely.
By immediately writing off purchased goodwill the company makes the treatment of goodwill equitable throughout the company. As inherent goodwill is not shown as a direct asset in the usual balance sheet it seems contradictory and inconsistent to record purchased goodwill. In addition, as it is not possible to realise goodwill independently of the company and it cannot be attributed a capital worth in a liquidation it seems unrealistic to record goodwill as an asset in the balance sheet. This would also suggest that amortisation of the intangible asset over any period should not be deferred and attributed to any future income.
However, in practise the immediate write-off to reserves is not altogether straightforward. As the goodwill has already been allocated an economic value for the purposes of the company sale it is difficult to argue that purchased goodwill is not an asset. The immediate writing off the amount to reserves ignores the existence of purchased goodwill. As outlined by Robins, it is also "inconsistent to charge expenses incurred for building up inherent goodwill to the profit and loss account and to write off purchased goodwill against the reserves" By amortising the intangible fixed asset through the profit and loss account either over its "economic useful life" or over a specific number of years, the goodwill can be treated as an asset and can be referenced as a cost incurred in the anticipation of future earnings. It would appear t to make more sense if purchased goodwill were regarded as an asset for which consideration was paid which does not lose its value over time although this is not acceptable under current accounting practises.
NON-PURCHASED GOODWILL
However, the discussion becomes interesting when the concentration is returned to the area of non purchased goodwill. It can be neither realistic nor subjective to recognise purchased goodwill but not inherent goodwill.
In addition, over the course of time it is possible that the value of goodwill would increase and therefore it seems illogical that goodwill should be amortised within the balance sheet.
There is also the concern that it is difficult to recognise or define what might be considered to be the "useful economic life" of goodwill – this is both subjective and changeable.
The introduction of FRS 10 confirmed that inherent goodwill should not be capitalised. For purchased goodwill, it prefers the option to capitalise the purchased goodwill as an asset and amortise over the useful economic life. It also suggests that other intangible assets should be treated similarly.
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CONCLUSION
Given that inherent goodwill can only become a recognised asset when a company is in a position to become marketable and a figure placed on this intangible asset it is easy to understand why the initial statement of this essay is quoted. However, when a company asset can only be realised when determining a price for acquisition, can it and should it be included within the regular balance sheet?
When there are so many variables that are considered subjective and cannot be considered to be in any way stable or rooted to the regular elements of the balance sheet it is difficult to define a clear treatment strategy for the inherent goodwill of a company within the balance sheet.
However it is the fact that the decision to sell / buy a company suddenly enables the goodwill element to become a clear and "priceable" intangible fixed asset that makes a mockery of the balance sheet. Given that it is merely a change in circumstance that has facilitated the ability to price this intangible element it appears unreasonable that the asset could not and should not be priced during its "inherent" life. By treating the intangible fixed asset in this inconsistent and unrealistic way, does in fact appear to suggest that the balance sheet is only representative of a company's worth during a time of merger or acquisition.
Given that inherent goodwill can only become a recognised asset when a company is in a position to become marketable and a figure placed on this intangible asset it is easy to understand why the initial statement of this essay is quoted. However, when a company asset can only be realised when determining a price for acquisition, can it and should it be included within the regular balance sheet?
When there are so many variables that are considered subjective and cannot be considered to be in any way stable or rooted to the regular elements of the balance sheet it is difficult to define a clear treatment strategy for the inherent goodwill of a company within the balance sheet.
However it is the fact that the decision to sell / buy a company suddenly enables the goodwill element to become a clear and "priceable" intangible fixed asset that makes a mockery of the balance sheet. Given that it is merely a change in circumstance that has facilitated the ability to price this intangible element it appears unreasonable that the asset could not and should not be priced during its "inherent" life. By treating the intangible fixed asset in this inconsistent and unrealistic way, does in fact appear to suggest that the balance sheet is only representative of a company's worth during a time of merger or acquisition.
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