Question

question 11

11. How is goodwill determined at the date of acquisition? Describe the nature of goodwill. 12. When must an intangible asset be shown separately from goodwill? What are the criteria for reporting these intangible assets separately from goodwill?

Answer 1

11. How is goodwill determined at the date of acquisition? In order to calculate goodwill, the fair market value of identifiable assets and liabilities of the company acquired is deducted from the purchase price. For instance, if company A acquired 100% of company B, but paid more than the net market value of company B, a goodwill occurs at the time of acquisition. Describe the nature of goodwill? We have to treat goodwill in accounting terms as an asset. It is not a physical asset because we cannot see or touch it. Despite this, we treat it as an intangible asset because we derive some value from it. According to Accounting Standards, an intangible asset must contain the following features. Since goodwill contains all these characteristics, we can conclude that it is an intangible asset. It must have characteristics of assets. a. This means that it must have some clearly identifiable value. b. The asset must have future economic benefits. The firm must be able to expect and predict what value they will get from it. c. Its value must be measurable. It is not an asset if we cannot measure its value in monetary terms. 12. When must an intangible asset be shown separately from goodwill? What are the criteria for reporting these intangible assets separately from goodwill? At the beginning we need to understand the difference between goodwill and other intangible assets Goodwill: a. Goodwill is a miscellaneous category for intangible assets that are harder to parse out individually or measured directly. Customer loyalty, brand reputation, and other non- quantifiable assets count as goodwill. b. A company's record of innovation and research and development and the experience of its management team are often included, too in goodwill. C. Goodwill cannot exist independently of the business, nor can it be sold, purchased, or transferred separately. As a result, goodwill has a useful life which is indefinite, unlike most of the other intangible assets. d. Goodwill only shows up on a balance sheet when two companies complete a merger or acquisition. Say a soft drink company was sold for $120 million; it had assets worth $100 million and liabilities of $20 million. The sum of $40 million that was paid over and above $80 million (the value of the assets minus the liabilities) is the worth of goodwill and is recorded in the books as such. Other intangible assets: a. Intangible assets are those that are non-physical, but identifiable. b. Think of a company's proprietary technology (computer software, etc.), copyrights, patents, licensing agreements, and website domain names, these aren't things that one can touch, exactly, but it is possible to estimate their value to the enterprise. C. Intangible assets can be bought and sold independently of the business itself.