In: Accounting
Under current U.S. GAAP, goodwill is recorded when purchased. Referencing the theory of capital maintenance, and/or the conceptual framework, should purchased goodwill be capitalized?
According to US GAAP ,Goodwill is recorded as the excess of the cost of an aquisition price over the fair value of the aquired net assets.It is written down only when the carrying amount of goodwill exceeds its implied fair value.To test goodwill for impairment ,companies must first assign purchased goodwill to reporting units.Before the new accounting treatment ,companies generally recorded goodwill in total and did not assign it individual reportings units.
Present argument against the capitalisation of "purchased goodwill" .you may consider tying your argument to theories of capital maintenance an /or the conceptual framework.
The primary argument against capitalisation of purchased goodwill is that the excess amount paid fr a business may nt represent goodwill at all,or at best only part of it would. Therefore purchased goodwill,even if parts of it represent assets,all of its doesn't and thus it should not be reported as an asset.
Purchased goodwill ,as currently measured ,is likely to be a combination of number of unidentifiable items,some of which might actually be goodwill,it may simply be the result of ability to bargain on the part of the selling company, and may not represent any excess earning capacity..it represents a control premium that the purchasr is willing to pay.just to own the aquired company, and does nt represent goodwill. it could include other intangible assets that are not meet the definatin of an asset, or only part of it might.
Goodwill is recognised only in case of when it is purchase in the business combination.purchased goodwillcould be defined as internally generated godwill which is n the day of acquisition objectively measured from the point of view of acquirer.
Because of the uncertainity associated with the nature of any excess payment to purchase a company .we cannot say that it is an asset,thus to report goodwill as an assets may vilet representaional faithfulness. The assets reported ,when the goodwil is included ,may or may not be asstes. If so,the qualitative characteristics of reliability would be violated.
In addition ,including a non asstes as an assets would result in improper measurement of capitals maintenance. If all or parts of goodwill is nt an asstes, it should be written off in the year of purchase ,is not,then income is overstated in the year of purchase. At a later date, if the goodwill is deemed to be impaired , income for the future period would be understand .in other words, proper matching revenue and cost would be occur.