At the end of this lecture you should be able to: * Explain what goodwill is * Explain the differences between purchase and non-purchased goodwill * Discuss evaluation and possible ways of accounting for goodwill * Explain and discuss the requirements of IFRS for ‘accounting for goodwill’ * Explain and discuss the requirement for Research and Development Intangible assets The IASB defines in IAS38 an intangible asset as: An identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services.
In the EU Fourth Directive, on which most of the European laws are based contains the following list in the balance sheet formats. Cost of research and development Patents Licences Trade marks Goodwill Goodwill Definition: The difference between the value of the business as a whole and the fair value of its separable net assets. Why does goodwill exist ? There are many items of benefit to a business that do not qualify the definition of an asset and are not included in the accounts.
Examples include Goodwill is in existence at all times but it is difficult to measure it and put a value on it .
They are not recognised on the Balance Sheet as they do not arise from an accounting transactions . Their value is independent of the amount spent. They cannot be sold separately without selling the business. Types of goodwill There are two types of goodwill Inherent goodwill Purchased goodwill Purchased goodwill arises as a result of a transaction: when one company buys another company . The acquirer may pay more or less than the value of the identifiable assets and liabilities. The difference is goodwill arising from an accounting transaction.
Non-purchased goodwill or internally generated goodwill is any goodwill other than purchased goodwill. Goodwill is an accounting anomaly. Every method of accounting results in inconsistencies with other aspects of accounting. Accounting for goodwill Controversial When do we recognise an asset? Inherent goodwill No capitalisation against prudence difficult to verify value. Purchased goodwill Like any other asset it has arisen as a result of past transaction and we have a verifiable cost attached to it How should we account for internally generated goodwill and purchased goodwill?
The issue in determining whether or not the goodwill is a recognisable asset is whether the company controls the resources. If the resources are seen as the loyal customers, trained staff, monopoly etc, it seems these are not controlled because the customer and the staff could leave and the monopoly position could be worn away or legislated against. Most accounting systems including IFRS, treat the goodwill as an asset that should be capitalised. In the domestic rules of some countries such as Germany and Netherlands it is legally possible to write off goodwill against reserves immediately on acquisition thereby never showing it as an asset.
IAS38 intangible assets simply requires that the asset arises from contractual or legal rights or that it is separable. However, this does seem to sit a little uncomfortably with the definition of an asset which includes a requirement that it can be controlled. Subsequent treatment of goodwill As with other items shown as assets, goodwill wears out. However, because it is not clear what goodwill is, there are problems with assessing its useful economic life.
However, some would argue that not only would goodwill not lose its value but its value will increase over time. Under international accounting standard the annual goodwill amortisation charges are replaced by an impairment test, to be carried out at least annually, which also applies to any other intangible assets with an indefinite useful life. Intangibles with finite lives continue to be amortised (subject to impairment) although unlike UK GAAP and previous IFRS there is no rebuttable presumption of a maximum useful life of 20 years. Impairment review
Charge goodwill to the profit and loss account only to the extent that the carrying value of goodwill is not supported by the value of goodwill within the acquired business. Test for impairment Systematic amortisation is a practical means of recognising the reduction in the value of goodwill that has a limited useful economic life. Where goodwill and intangible assets are regarded as having limited useful economic lives, they should be amortised on a systematic basis over those lives. Where good will and intangible assets are regarded as having indefinite useful economic lives, they should not be amortised.
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Essay about Intangible Assets. (2016, Sep 03). Retrieved from https://graduateway.com/essay-about-intangible-assets/