Goodwill Essay Research Paper AbstractGoodwill is an

Goodwill Essay, Research Paper

Abstract

Goodwill is an unidentifiable intangible asset that has always been a debatable issue when it arrives during financial reporting. The reason being that it is dependable on various factors, which are of a variable nature, for its value determination.

Nevertheless, it is an important asset that can not be neglected and has to be accounted for properly for realistic financial statements. Other than that, it plays an extremely crucial role in giving a competitive edge to companies against their foreign competitors. With no standard international methods and tax policies for accounting of goodwill, it becomes all the more controversial.

Introduction

This paper aims to discuss the following statement:

Goodwill is defined by AASB 1013 the future benefits from unidentifiable assets. Therefore, annual reports of Australian companies will always show the future benefits arising from the assets like the intellectual capital found in its people and processes or relationships with customers. Furthermore, it is useful to benchmark the goodwill reported by an Australian company against that reported by international competitors.

It also aims to understand the meaning and nature of goodwill and the accounting practices associated with it in Australia and around the world.

Understanding Goodwill

Goodwill is defined by AASB 1013 as the future benefits from unidentifiable assets. To discuss this statement and to understand the meaning of goodwill; it is important that we first determine what are unidentifiable (intangible) assets .

According to Henderson S. et al (1998: 316), Intangibles are those assets that represent future economic benefits to an organization due to its past transactions or other events. He has then categorized intangibles as identifiable such as patents, copyrights, trademarks etc or unidentifiable such as efficient employees, an established client database, a good public image etc. We will focus on unidentifiable intangible assets for the purpose of this discussion.

Bazley M. Et al (1999: 212), states that unidentifiable intangible assets are the benefits that flow to an organization from such things as good location, outstanding image in the market place or excellent customer relations. Goodwill is the name used to describe the future economic benefits which flow from the collection of all these unidentifiable assets.

Goodwill, according to Henderson S. et al (1998: 320), has been termed as K an entity s unidentifiable intangible assets. In his terms, these assets may include loyal and efficient employees, established clientele, suppliers who can be depended upon K

Thus, it can be said that Goodwill of a company is an asset that cannot be associated with any other asset and its value is a collection of all the favorable factors of a business that cannot be really put down on paper or shown as a materialistic commodity. So, they are all put together under goodwill enabling a firm to extract some favorable and cashable value out of them.

Due to its this unique characteristic and its variable constituents, most authors argue that goodwill should only be added in the balance sheet at the time of an arm s-length transaction , Henderson S. et al (1998: 319). He also states, pg. 320, that it is a generally agreed by accountants that goodwill should not be recognized in the accounts unless there is an arm s length purchase of one entity by another. Goodwill will appear as an asset on a balance sheet only when it was paid for in connection with the acquisition of another company , (www resource 1). Another supporting reason for this practice is that an appropriating value can only be determined at the time of the business being sold, Stanley P. (2000: 150). Therefore, based on the above evidence, I would like to differ from the essay s discussion statement, Kannual reports of Australian companies will always show the future benefits arising from assets like K . However, another perspective of this statement could be that the reason behind recording the future benefits and intangible assets will point out the healthy and solid standing of the business which can be gained only over time.

Definition of goodwill

Goodwill has been a source of controversies in the world of accounting since a long time.

However, there are two widely accepted definitions of the term now. These approaches are:

h Residuum approach

Under this method, goodwill is taken to be the difference between the purchase price and the fair market value of an acquired company s assets . (Www resource 2)

h Excess profits approach

Under this method, the present value of the projected future excess earnings over normal earnings for similar businesses is recorded as goodwill. Due to uncertainty of future earnings, valuing goodwill using this method is difficult . (Www resource 2)

The nature of goodwill

Since, goodwill has been a debatable issue in the world of financial reporting since early times, it is important to understand that the goodwill of a firm may fluctuate over various periods of time due to the factors that it depends on. Some of these factors other than the ones discussed earlier may be:

h The human resource pool of the firm

h The brand name va

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