Question

Financial Accounting Research System (FARS) Assignment

Biotech recently purchased a subsidiary and records a goodwill of $5,000,000 on its balance sheet as an asset. In addition to the goodwill arising from the acquisition, Biotech believes the company has created its own goodwill from years of operation and brand building, and the value is $2,000,000. Therefore, Biotech reports a total of $7,000,000 goodwill on its balance sheet. To ensure that goodwill is properly valued on its book, the company amortizes the goodwill over a period of ten years. For example, in fiscal year 2018, the company recorded a goodwill amortization expense of $700,000 [=$7,000,000/10years]. The objective is to account for the decline in the value of goodwill over time.

As an intern of a public accounting firm, your supervisor asks you to analyze goodwill reporting for this local client. Specifically, prepare a report describing how Biotech should report its goodwill. If its current practice(s) are correct, cite the codification codes to support your conclusion. If its current practice(s) are incorrect, cite the codification codes to show how they should be reported.

Answer 1

Self generated goodwill can not be recorded or capitalised in the books, as it is non quantifiable. All expenses made for generation of goodwill should be charged to profit and loss account of the fiscal year they have been incurred.

On the other hand, goodwill generated through business combinations should not amortised over the period, instead it should be impaired based on the results of impairment testing.

Based on above Biotech's accounting of goodwill is incorrect and following codification will support the correct reporting of goodwill in accounting records of Biotech:

350-20-35-3 Biotech should first assess qualitative factors, as described under codes from 350-20-35-3A to 350-20-35-3G to identify whether the impairment test is required.

As a result of qualitative factors, if impairment is required, than impairment loss will be computed under the steps followed in codes from 350-20-35-4 to 350-20-35-19.

Same process as mentioned in above codes to be performed annually. The same process can be followed in between the annual  tests, in case of any unusual event or circumstances require for impairment test.

Quantitative disclosures to made under code 350-20-50-3. Code 350-20-50-2(c) requires disclosure of the fact that the measurement of the impairment loss is an estimate. Any adjustment to that estimated loss based on the completion of the measurement of the impairment loss shall be recognised in the subsequent reporting period.