Question

For each question, (1) provide the citation number (topic and subtopic) that addresses the question and (2) answer the question. Document this under the question, indenting your answer or otherwise indicating it is the answer (bold, underline, different color, etc.)

1. Goodwill

King Company is contemplating the purchase of a smaller company, which is a distributor of King's products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. You audit senior asked you to document the effects of the acquisition on the combined company's financial statements.

(a) Identify the primary authoritative guidance that addresses goodwill and other intangible assets.

(b) Define goodwill.

(c)  Is goodwill subject to amortization? If not, would it ever be reflected in the income statement? Explain.

(d)  When goodwill is recognized for a subsidiary, how should it be reviewed or tested for impairment?

Answer 1

GoodWill is an Intangible Asset that arises when a Buyer acquires an Existing Business.

a)Goodwill has an Indefinite Life while other Intangible assets have a finite life.Goodwill cannot be bought or sold separately.One need to acquire or sell only during transfer of business.While all other Intangibles can be bought or sold independently.Goodwilll is the premium paid over the fair value of other assets during purchase.In many cases value of goodwill is very much more than value of all other assets in total.Goodwill is the most valuable asset though quantifying its value is complex

b)Goodwill is the reputation that business has earned over its lifetime.It is an Intangible asset that arises when a buyer acquires an existing business.Goodwill doesnot have a definite life and in US GAAP goodwill is not amorised unlike other Intangible assets but tested for impairment every year.Goodwill cannot be separated from other assets

c)Under US GAAP and IFRS Goodwill is not subject to amortisation as it is considered to have an indefinite life but should be tested for annual impairment if any

Goodwill can be recognised only if it is acquired out of business combination.Internally generated goodwill should not be capitalized in the books.So Goodwill will not be reflected in Income Statement.Only Impairment losses if computed for goodwill can be written off in Income Statement

d)If there is an Impairment of Goodwill of a Subsidiary it should be reduced to parent's share only.It is because Parent company has acquired subsidiary by paying money for goodwill too so when goodwill is Impaired it is first written off in parent's share before writing off share belonging to Non controlling Interest