UK Accounting essay HELP - IASB!!!

[Sim_Mo2000]

Hi guys,

My first post on here, I am currently studying accounting and finance in the UK and need some ideas for an essay.

Essay revolves around why goodwill has different accounting treatment to other intangible assets such as purchased brands, copyrights etc.

I have a few basic ideas however if anyone could come up with points that are for/against the differential treatment of goodwill then it would be appreciated.

 

[AGH the CPA]

"you must attempt the question yourself before asking for help. You can then state the answer you have so far and explain which aspect you need help with. "

So.... show us what you have so far.

 

[Sim_Mo2000]

"you must attempt the question yourself before asking for help. You can then state the answer you have so far and explain which aspect you need help with. "

So.... show us what you have so far.

Firstly, we need to distinguish the differences between goodwill and other intangible assets so that we can see the reasoning behind the differential treatments. The IASB states that the definition for an intangible asset requires an intangible asset to be identifiable so that we can distinguish it from goodwill. It states that goodwill is an asset representing the future economic benefits arising from other assets that cannot be identified or separated. However; if we look at other intangible assets such as a patent, we can separate a patent from the business and it can be sold without affecting other parts of the business. On the contrary goodwill cannot be separated from the business on its own. If I purchased a company, I could not sell goodwill by itself, I would have to sell the whole business whereas if I purchased a business that had a specific patent I could easily sell the patent without it affecting the rest of my operations.
For this reason, we can see why the IASB prefers to have an impairment review as goodwill, when a business combination takes place; goodwill is the price paid over the net book value of the business. If I believe company Y is worth 120M but the company assets are worth 100M, I am paying 20M in goodwill on the basis that I believe this goodwill will give me future economic benefits. If the business performs poorly, my opinion of the goodwill may not be as high as I thought it was therefore the next accounting year will show an impairment figure. The impairment figure gives us a factual valuation of what my valuation of goodwill is. If my company performs better than expected I would expect goodwill to increase and therefore an annual impairment would show that my goodwill figure has increased.

That is my answer so far, the part I need help with is that I can't see the cons of the IASB treating goodwill differently. As this is a discuss question I know I need to present arguments for and against the differential treatment.

 

[Fidget]

Perhaps you could come at it from the angle of discussing why it can't be treated the same as other intangible assets? You've already identified that it's not an asset in its own right because it only exists because of other assets, so it needs different treatment. The assets it relates to can be tangible and/or intangible. So if there's an argument for treating goodwill the same as any other intangible asset, there's an argument for treating any part of it that relates to tangible assets in the same way as the tangible assets it relates to.

There's also these two, which are linked:

* Once goodwill is impaired, the impairment can't be reversed if the conditions that caused it no longer exist.

If it was treated the same as any other intangible, then any impairment would be able to be reversed if the conditions that caused it no longer exist (this used to be possible under certain circumstances, but was abolished). But, the IASB's take on it (IAS 36) is that since goodwill is basically a premium a buyer pays for the related assets at the time of purchase, any increase in goodwill after impairment therefore constitutes capitalising internally generated goodwill.

* Internally generated goodwill is not recognised.

If treated the same as other intangibles, then it would be possible to capitalise internally generated goodwill as can be done with some other internally generated intangibles, but that isn't allowed because internally generated goodwill can't be quantified.

Just a couple of ideas for you.

 

[Sim_Mo2000]

Perhaps you could come at it from the angle of discussing why it can't be treated the same as other intangible assets? You've already identified that it's not an asset in its own right because it only exists because of other assets, so it needs different treatment. The assets it relates to can be tangible and/or intangible. So if there's an argument for treating goodwill the same as any other intangible asset, there's an argument for treating any part of it that relates to tangible assets in the same way as the tangible assets it relates to.

There's also these two, which are linked:

* Once goodwill is impaired, the impairment can't be reversed if the conditions that caused it no longer exist.

If it was treated the same as any other intangible, then any impairment would be able to be reversed if the conditions that caused it no longer exist (this used to be possible under certain circumstances, but was abolished). But, the IASB's take on it (IAS 36) is that since goodwill is basically a premium a buyer pays for the related assets at the time of purchase, any increase in goodwill after impairment therefore constitutes capitalising internally generated goodwill.

* Internally generated goodwill is not recognised.

If treated the same as other intangibles, then it would be possible to capitalise internally generated goodwill as can be done with some other internally generated intangibles, but that isn't allowed because internally generated goodwill can't be quantified.

Just a couple of ideas for you.

Thank you for your input, will develop my answer with the points you have given.

 

[Fidget]

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