Summary of 9.1 Overview: accounting for goodwill post acquisition
- How should goodwill be accounted for?
- How to account for goodwill in accounting?
- What is the account of goodwill?
- How to account for purchased goodwill?
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AI Overview
AI Overview
Goodwill is an intangible asset recorded on the balance sheet when one company acquires another for a price exceeding the fair market value of its net identifiable assets. It represents reputation, customer loyalty, and brand value. It is not amortized but tested annually for impairment, where a loss is recorded if its value drops.
Calculation of Goodwill
Goodwill is calculated as the excess of the purchase price over the fair value of net assets (assets minus liabilities).
Formula:
Purchase Price
−
(
Fair Value of Assets
−
Fair Value of Liabilities
)
=
Goodwill
P
u
r
c
h
a
s
e
P
r
i
c
e
−
(
F
a
i
r
V
a
l
u
e
o
f
A
s
s
e
t
s
−
F
a
i
r
V
a
l
u
e
o
f
L
i
a
b
i
l
i
t
i
e
s
)
=
G
o
o
d
w
i
l
l
.
Example: If Company A buys Company B for
$
$
5
million, but the net identifiable assets are worth
$
3.5
$
3
.
5
million, the Goodwill is
$
1.5
$
1
.
5
million.
Recording and Reporting
Balance Sheet: Recorded under intangible assets.
Recognition: Recognized only upon the acquisition of another business (purchased goodwill), not internally generated.
Accounting Treatment (Amortization vs. Impairment)
No Amortization: Under US GAAP, goodwill is not amortized or depreciated because it is considered to have an indefinite life.
Impairment Testing: Companies must test for impairment annually or when events indicate the value has decreased.
Impairment Loss: If the fair value of the acquired company falls below its carrying amount, a impairment charge is recognized as an expense on the income statement, reducing the asset’s value on the balance sheet.
Key Differences
Identifiable Assets: Tangible (machinery) or identifiable intangible (patents, trademarks) assets.
Goodwill: Non-identifiable intangible asset.
Goodwill, Patents, and Other Intangible Assets
In accounting, goodwill is an intangible value attached to a company resulting mainly from the company’s management skill or know-
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·
Marshall Hargrave
1:42
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