How is goodwill treated in accounting?
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A. Seetharaman (Faculty of Management, Multimedia University, Cyber Jaya, Malaysia)
M. Balachandran (Faculty of Management, Multimedia University, Cyber Jaya, Malaysia) A.S. Saravanan (Faculty of Management, Multimedia University, Cyber Jaya, Malaysia) The issue of goodwill has been debated in many countries throughout the world. Despite numerous efforts and the existence of accounting standards and exposure drafts issued by various professional bodies internationally, there is yet to be a universally accepted accounting treatment for goodwill. The opinion on this subject differs and changes frequently. The dichotomy of having to preserve prescribed
recognition criteria on the one hand and the need to report useful information on the other has led to the many controversial issues debated on the subject of goodwill. This study centres around the international accounting treatment of goodwill in the past, present and future. This study reviewed some of the issues that surrounded the accounting for goodwill where it was found that goodwill accounting had faced many problems. Besides problems, this project also looks into the prospect of the
accounting for goodwill in the cyberspace era and emergence of the knowledge‐based economy. This study confirms that controversy remains internationally with no solution in sight in the foreseeable future internationally. Seetharaman, A., Balachandran, M. and Saravanan, A.S. (2004), "Accounting treatment of goodwill: yesterday, today and tomorrow: Problems and prospects in the international perspective", Journal of Intellectual Capital, Vol. 5 No. 1, pp. 131-152.
https://doi.org/10.1108/14691930410512969 Emerald Group Publishing Limited Copyright © 2004, Emerald Group Publishing Limited Related articlesBusiness Revised GAAP Treatment for GoodwillApril 25, 2016 | Stanley W. Self, CFE  The Relevance of GoodwillGoodwill can be informally understood as the price paid during acquisition of an existing business that is above the cumulative net value of all the assets of the acquired business. For example, if the net value of an acquired business’s assets is $1,000,000 but the purchase price of that business is $1,250,000, then “goodwill” would be $250,000. A more formal definition of goodwill is: “An intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet” (Investopedia, 2016). Any individual or company that acquires another ongoing business operation will be extremely interested in the disposition of goodwill because of the potential effects on the financial statements and ultimate tax treatment for related accounts (Cohn, 2013). The concept of the “time value of money” will also be an important consideration. Brief History of Goodwill and GAAPGoodwill made its entrance into accounting during the nineteenth century. In the late 1800s, a business combination or acquisition generally presented the exchange of assets in which the acquired company’s historical (or book value) was less than the value of the cash paid or stock shares issued. In those early instances, the difference was capitalized under the equity heading titled “goodwill.” The inclusion of goodwill was roundly criticized as a form of financial statement management and, “a device of stock watering manipulations: such an item is not merely immaterial, but also imaginary.” (https://basepub.dauphine.fr/bitstream/handle/123456789/2638/fulltext%20EAA2007.pdf). Subsequent Major GAAP pronouncements that revised Goodwill Accounting during the twentieth century allowed goodwill accounting to evolve from the abolition of goodwill as a valid accounting treatment into a technique that required the annual analysis for impairment of goodwill. This process could become costly and unwieldy (FASB, 2014). The New GuidanceThe Financial Accounting Standards Board (FASB) revised U.S. generally accepted accounting principles (GAAP) to include alternatives for private companies’ treatment of goodwill. And, FASB Accounting Standards Update No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, permits a private company to amortize goodwill on a straight-line basis over a period of 10 years (Mirea, 2013). Under certain circumstances, another useful life is allowed when it can be demonstrated that it is appropriate. ConclusionOne alternate method for goodwill states that it should be tested for impairment when a triggering event occurs that indicates that the fair value of the goodwill may have fallen under its current book-value. A private company that elects the impairment alternative must adopt an accounting policy to test goodwill for impairment at the appropriate organizational level. The other alternative is the amortization method (Cherry-Bekaert, 2015). The relief from the requirement to test goodwill for impairment at least annually is expected to result in significant cost savings for many private companies. Although the new treatment only extends to private companies for now, FASB also recently decided to add a project to its agenda on the subsequent accounting for goodwill for public companies and not-for-profit organizations (FASB, 2014). One very interesting related topic for future discussion is the effect that adoption of new goodwill amortization and impairment GAAP policies may have is on the increased use of “earnings management” by organizations. Research indicates that new rules allowing more flexible treatment of goodwill expense dramatically impacts managers’ behavior when presenting financial statements (Caruso, Ferrari & Pisano, 2016). Stanley W. Self, CFE, is a professor at Purdue Global. The views expressed in this article are solely those of the author and do not represent the view of Purdue Global. References Caruso, G., Ferrari, E., & Pisano, V. (2016). Earnings management and goodwill impairment. Journal of Intellectual Capital, 17,(1), 120 – 147. Retrieved from http://dx.doi.org/10.1108/JIC-09-2015-0081 BakerTilly (2015, February). FASB accounting standards offer GAAP relief for private companies. Retrieved from http://bakertilly.com/insights/fasb-accounting-standards-offer-gaap-relief-for-private-companies/ Cohn, M. (2013, November 25). FASB Endorses Changes in Accounting Standards for Goodwill and Interest Rate Swaps. Accounting Today. Retrieved from http://www.accountingtoday.com/news/FASB-Endorses-Changes-Accounting-Standards-Goodwill-Interest-Rate-Swaps-68849-1.html FASB (2014, January 16) FASB issues two updates for private companies on accounting for goodwill, interest rate swaps. Retrieved from http://www.fasb.org/cs/ContentServer?pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176163742955 Investopedia (2016) Definition of Goodwill. Retrieved from http://www.investopedia.com/terms/g/goodwill.asp#ixzz3xdYecoZH About the Author Purdue University Global delivers a fully personalized, world-class education online that's tailored for adults. We offer 175 programs, including associate's, bachelor's, master's, and doctoral degrees as well as certificates, in areas such as business, IT, education, health sciences, nursing, criminal justice, and more. Your Path to Success Begins Here Learn more about online programs at Purdue Global and download our program guide. Request Information Your Path to Success Begins Here Learn more about online programs at Purdue Global and download our program guide. Request Information What is the accounting entry for goodwill?Goodwill is an adjusting entry on the balance sheet to help explain why the cash spent to acquire a company is greater than the assets received in return. To start, determine the value of net identifiable assets by subtracting liabilities from identifiable assets like inventory and real estate.
What is goodwill and how is goodwill treated?Goodwill is a premium paid over the fair value of assets during the purchase of a company. Hence, it is tagged to a company or business and cannot be sold or purchased independently. In contrast, other intangible assets like licenses, patents, etc., can be sold and purchased separately.
What is goodwill and how is it recorded?Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than 1) the fair value of the identifiable tangible and intangible assets acquired, minus 2) the liabilities that were assumed. Goodwill is reported on the balance sheet as a long-term or noncurrent asset.
How is goodwill treated in income statement?As it involves intangible assets, recording goodwill on financial statements such as balance sheets requires listing them as “noncurrent assets”. This represents an asset that counts as a long-term investment whose full value cannot be realised within the current financial year.
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