Over the years, there have been various accounting treatments of purchased goodwill as follows:
1. Immediate write off against reserves
2. Capitalisation with amortization over a pre-selected number of years
3. Capitalisation with annual impairment reviews
Using the IASB Framework, you are required to evaluate each of the above alternative treatments.
Introduction
Goodwill is the difference in monetary value between the amount paid by a purchasing company and the book value of the purchased company’s net assets (Moehrle and Reynolds-Moehrle, 2001). However, there has been debate over the recognition of goodwill as an asset. The Concept Statement No.6 (Financial Accounting Standard Board, 1985, p.16) defines an asset as having two characteristics. Firstly, future economic benefits are expected to arise, a view accepted by Nethercott and Hanlon (2002, cited Dagwell et al, 2004, p.2) in regard to goodwill. The second characteristic concerns how controllable an item is as a result of past events. Harrington (1999) argues that goodwill is not independently reliasable, a point agreed by Sundararajan (1995), and that management has little control over it, which was the school of thought behind an immediate write off against reserves. However, Johnson and Petrone (1998) explain how, in 1997, the Financial Accounting Standards Board (FASB) agreed that goodwill met the definition of an asset as described in the Concept Statement No. 6.
The International Accounting Standards Board (IASB) Framework, concerning the preparation and presentation of financial statements, identfies four qualitative characteristics that should be inherent (Deloitte, 2008). This essay will c ...