Question

The reported goodwill on the Balance Sheet may reveal managers’ private information of a firm’s future cash flows. However, research argues that subsequent treatment of goodwill may provide opportunities for earnings management. Discuss whether the accounting treatment of goodwill in subsequent years could be a concern for financial reporting.

Answer 1

Answer:

The accounting treatment of goodwill in subsequent years could be a concern for financial reporting. Goodwill is an intangible asset and is normally paid to show that the company is expected to operate in the long-run. It is an intangible asset paid on top of the fixed assets of the company. For example, if company A wants to buy company B, then it has to pay for the fixed assets( manufacturing plant, equipment, machinery) and on top of that it has to pay for the quality that company B held(may include the company's name, the quality of customers), and this is the intangible asset which is the goodwill. Therefore, as stated above, the accounting treatment of goodwill in subsequent years could be a concern for financial reporting. Goodwill has an indefinite lifetime, hence valuations are conducted every year and this has to be recorded in the balance sheet as a non-current asset. If the value of goodwill decreases, this has to be recorded so that the value can be brought back to its market value. Any increase in the value of goodwill is not normally recorded, only the initial market price is recorded .