Valuation of Goodwill
- Pages: 6
- Word count: 1347
- Category: Finance
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Goodwill is an intangible element connected with the going concern which include personality, reputation, the company name, convenient and favourable location of the business, quality of merchandise, efficient management, supply and demand for a choice product, affordable prices, efficient labour relations with employees, true and fair view and finally courteous methods of treating customers. Goodwill is often shown on the accounting books and records and therefore on the balance sheet only when it has been purchased. In the concluded analysis, the real test of existence of goodwill is the ability to earn a rate of return which is higher than it is usually realized in the industry. Some companies write off the cost of goodwill over a period of a few years as a special item on the statement of income. A charge off in the year of acquisition is not considered good practice. If the excess profits which serves as the initial evidence of the existence of goodwill have been stated, the goodwill is written down then the assets or owners’ equity will be understated and will not give a true and accurate position of the company. When the goodwill asset no longer has value the write off corrects the assets and owners’ equity values. AIMS AND OBJECTIVES OF VALUATING GOODWILL IN A BUSINESS.
The International Accounting Standards Board (IASB) regulations states that goodwill should be recognized as a fixed asset and classified as an intangible asset when it is purchased, acquired or merged together in a business combination and to have its accounting value assessed annually for any impairment in value. An impairment loss is written off against profits. Some companies acquire goodwill for the company such as employee skills, customer’s loyalty and the location of business premises and there is no goodwill in its balance sheet therefore the value for such goodwill is not accounted for in the company report.
The Companies Act 1985 requires that goodwill which has a limited useful economic life is to be reduced to their residual value that is the “Scrap Value” over such life that is exceeding the time that it will be used by the company. The core objectives of valuating and managing of goodwill properly is to prescribe the accounting treatment for goodwill as an asset and identify how to recognise and know the worth in the annual report as represented in the company’s balance sheet showing the true and accurate position of the company. It also shows how to measure the carrying amount of the goodwill and it requires certain disclosures as stated by the International Accounting Standard (IAS). The value of goodwill amortised or capitalised during the year should be disclosed in accordance with the Statement of Standard Accounting Practice (SSAP). EXAMPLES
When goodwill is shown in the balance sheet whether acquired, purchased or merged together in a business, it should be shown as an intangible fixed asset and separate from other intangible assets e.g. patents, concessions, licences, trademarks and other similar rights and assets. Some companies follow the rules that non-purchased goodwill should not be stated or that purchased goodwill should not necessarily appear in the balance sheet as a fixed asset but the preferred treatment for such purchased goodwill should be written off immediately it is acquired against the reserves while some other companies regard amortization through the company’s profit and loss account as another alternative. The contrasting treatments have caused a lot of criticism. CURRENT REGULATIONS
The Accounting Standard Board (ASB) has set up a priority for the resolution of this problem, while the Statement of Standard Accounting Practice (SSAP) and the International Accounting Standards Board (IASB) is currently working on a joint treatment for goodwill in the balance sheet for accurate assessment of the goodwill asset. PROBLEMS
Goodwill is one of the most controversial and difficult item to treat for a number of years and there has been a lot of considerable difficulties in arriving at an agreement for the most sensible treatment. Nobes (1989) argued that it should be capitalized and amortized over a number of years while Stacey and Tweedie (1989) believed that it is better to leave goodwill on the balance sheet unless there is a permanent diminution in value. Finally, there are some who argue that goodwill should be written off against reserves once its value is uncertain and can not be dispose of separately from the business. These different and conflicting points of view have led to an unsatisfactory standard which different companies use in assessing goodwill as an asset on the balance sheet when giving the company’s annual reports. FINDINGS OF ANALYSIS A
From the hypothesis carried out, it was discovered that where a goodwill is being amortized, the movement on the goodwill account in the year shows the cost accumulated amortization and the net book value at the beginning of the year and at the end of that same year and the amount of goodwill amortized through the profit and loss account during the year and the period chosen for amortising the goodwill asset relating to each major acquisition. The true and fair value of the consideration and the amount of purchased goodwill arising on each acquisition during the period should be separately stated. The process of dealing with merger reserve or another reserve or maybe it has been carried forward as any fixed intangible asset should be disclosed. FINDINGS OF ANALYSIS B
The book values as recorded in the acquired company’s accounting books at the date of acquisition but before any acquisition adjustments, the fair values of each of the major category of assets and liabilities acquired. The major category of assets and liabilities and their various adjustments should be analysed as follows: 1. Revaluations
2. Provisions for future trading losses
3. Other accepted provisions
Amounts not found within the above three categories should be analysed as: 1. Using the accounting policies into line with those of the acquiring group 2. Any of the major item
DISCOVERY AND DISCUSSION
Further research shows that disclosure of information relating to goodwill is very important and it is required both under the Statement of Standard Accounting Practice (SSAP) and the the Companies Act. Under SSAP 22, the following information should be disclosed separately for each material acquisition and in summation for other acquisitions where these are material in aggregate although not so individually. CONCLUSIONS
In conclusion, the accounting treatment of goodwill which is currently applied by Financial Reporting Exposure Draft (FRED 12) states that goodwill as an asset is the subject of an exposure draft. Goodwill as an intangible asset arises when the value of the business as a whole exceeds the sum of the values of the identifiable net assets. RECOMMENDATIONS
1. The accounting policy should be stated and explained because it is required under schedule 4:36 of the Companies Act. 2. The amount of any goodwill recognised from any form of acquisitions during the year must be shown separately.
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