Question

1. When do we recognize goodwill?

2. Can we use LIFO to measure inventory?

3. Difinition of operating VS. Finance lease?

4. Can we report deferred taxes under the current section of the balance sheet?

5. How much is the inital amount of a "share based payment" ?

6. Are we allowed to capitalize interests on long term assets?

Answer 1

1)
Accounting Accounting and Finance

Why do we recognize goodwill in accounting and when do we recognize it?

[Hamzur Nawal]
Hamzur Nawal
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[SHAHZAD Yaqoob]
by SHAHZAD Yaqoob SENIOR ACCOUNTANT - 1 year ago

In accounting, goodwill is an intangible asset associated with a business combination. Goodwill is recorded when a company acquires (purchases) another company and the purchase price is greater than the combination or net of 1) the fair value of the identifiable tangible and intangible assets acquired, and 2) the liabilities that were assumed.Goodwill is reported on the balance sheet as a noncurrent asset. Since 2001, U.S. companies are no longer required to amortize the recorded amount of goodwill. However, the amount of goodwill is subject to a goodwill impairment test at least once per year.Outside of accounting, goodwill could refer to some value that has been developed within a company as a result of delivering amazing customer service, unique management, teamwork, etc. This goodwill, which is unrelated to a business combination, is not recorded or reported on the company's balance sheet.

Goodwill is only recognised as a result of a business combination and represents the difference between the total purchase consideration and the total of the fair values of the acquired assets, including recognised intangible assets, and liabilities assumed. If the amount of goodwill is negative, that is the total fair value of acquired assets and liabilities is more than the purchase consideration, the excess must be recognised immediately as a profit.

2)yes we can use LIFO to measure inventory

The "Last In, First Out" method of inventory entails using current prices to count a measure called "the cost of goods sold," as opposed to using what was paid for the inventory already in stock. If the price of such goods has increased since the initial purchase, the "cost of goods sold" measure will be higher and thereby reduce profits and tax burdens. Nonperishable commodities like petroleum, metals and chemicals are frequently subject to LIFO accounting.

"LIFO isn't a good indicator of ending inventory value, because the leftover inventory might be extremely old and, perhaps, obsolete," Melwani said. "This results in a valuation much lower than today's prices. LIFO results in lower net income because cost of goods sold is higher. So [there is a] lower taxable income. By using more recent inventory in valuation, your cost basis is higher on current income statements. This reduces gross profit and ultimately net income. This is the implication of LIFO, and many companies prefer LIFO because lower profit reporting means a reduced tax burden."

4) Operating lease-

An operating lease is a lease whose term is short compared to the useful life of the assetor piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.

Finance lease-

A finance lease (also known as a capital lease or a sales lease) is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset, but also has a substantial share of the economic risks and returns from the change in the valuation of the underlying asset. [1]

More specifically, it is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle, software);
• the lessor (finance company) will purchase that asset;
• the lessee will have use of that asset during the lease;
• the lessee will pay a series of rentals or installments for the use of that asset;
• the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;
• the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price)

4)yes we can report deferred tanes under current section of the balance sheet

Deferred tax asset is an accounting term that refers to a situation where a business has overpaid taxes or taxes paid in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief, and the over-payment is, therefore, an asset for the company. A deferred tax asset can conceptually be compared to rent paid in advance or refundable insurance premiums; while the business no longer has cash on hand, it does have comparable value, and this must be reflected in its financial statements.
6)yes we are allowed to capitalize interests on long term assets-

The practice of capitalizing the interest due over the
contracted period on long-term borrowings as part of the
value of fixed assets has spread widely in the last three
years. In this study, the author examines the rationale
and motives of corporate management in adopting this
practice and brings out its merits and demerits. While
the practice provides immediate tax gains and an op-
portunity for window-dressing, it has far-reaching, imp-
lications for professional management and accounting
in the corporate sector in India.