Question

You are the controller of the Small Corporation. Terry Small, the company owner, asked you why you recorded Goodwill as an asset on the books when Small purchased another company. How do you respond?

Answer 1

Good­will can be re­cog­ni­zed as an in­tan­gib­le as­set only if it is ac­qui­red in a bu­si­ness com­bi­na­tion. In­ter­nally ge­ne­ra­ted good­will can not be ca­pi­ta­li­zed in the ba­lan­ce sheet. Good­will can not be ca­pi­ta­li­zed be­cau­se it is not iden­ti­fiab­le, it has an in­de­termi­na­te use­ful life and it is not se­pa­rab­le from ot­her as­sets. In­tan­gib­les are iden­ti­fiab­le when they re­sult from con­tractual or le­gal rights or are se­pa­rab­le. Ac­qui­red in­tan­gib­le as­sets which are iden­ti­fiab­le and have in­fi­ni­te life must be re­cog­ni­zed in the ba­lan­ce sheet and be amor­ti­zed over their es­ti­ma­ted use­ful life. Ac­qui­red iden­ti­fiab­le as­sets in a bu­si­ness com­bi­na­tion are va­lued at their fair va­lues. The re­mai­ning va­lue af­ter the iden­ti­fi­ca­tion of all tan­gib­le and in­tan­gib­le as­sets is than as­sig­ned to good­will. IFRS (IFRS 3.51, 2007) claim that good­will is ini­tially mea­su­red as the dif­fe­ren­ce bet­ween the cost of the ac­quisi­tion over the ac­qui­rer’s in­te­rest in the net fair va­lue of the iden­ti­fiab­le as­sets, lia­bi­li­ties and con­tin­gent lia­bi­li­ties. Good­will re­cog­ni­tion re­qui­res the va­lua­tion of fair va­lues of all iden­ti­fiab­le in­tan­gib­le and tan­gib­le as­sets. Good­will re­pre­sents fu­tu­re eco­no­mic be­ne­fits ari­sing from as­sets which can not be re­cog­ni­zed se­pa­ra­tely (they do not meet the cri­te­ria for re­cog­ni­tion) and being in­di­vi­dually iden­tified. Af­ter the ini­tial re­cog­ni­tion of good­will, it should be mea­su­red at the cost lo­we­red by any ac­cu­mu­la­ted im­pairment char­ge. Good­will should be te­sted for im­pair­ment an­nually or more fre­quently if cir­cum­stan­ces in­di­ca­te that it might be im­pai­red.

Keeping the above in mind the Goodwill was recognised when Small purchased another Company