Synopsis
The multitude of academic literature on the nature and issues of intangible assets and goodwill have highlighted the numerous approaches to measuring and reporting goodwill. These issues of identifying and measuring goodwill have provided great challenges in communicating the relevant value for an organisation. However, they are becoming increasingly more important in an environment where goodwill and other intangible assets are making up larger components of business purchase/combination prices. In determining the correct value of goodwill in the financial statements, there are three bases of measurement in accounting that can be applied; historical cost, market value and net present value. Each method has its own costs and benefits in the application to goodwill, however these costs and benefits have concluded that there is no one superior measurement approach for goodwill. This suggests that the focus should be on the disclosure and understanding of the reported goodwill amount.
Introduction: The Nature of Goodwill
Goodwill is an unidentifiable intangible asset, which cannot be individually identified and is an intrinsic part of a business (Deegan, 2005, p.274). It cannot be sold or bought separately from the entity and may be built over a number of periods. It arises from how the physical assets and human resources of the entity have been employed within the business environment and may be attributed to factors such as market penetration, an excellent distribution network, good industrial relations and superior management (Miller, 1995, p.7). As goodwill today constitutes a much larger part of acquisition prices (Chauvin & Hirschey, 1994, p.160), it has greatly impacted on figures shown on financial statements. Thus, it is very im ...