The Financial Accounting Standards Board FASB is soliciting feedback on this topic as it considers whether to change the subsequent accounting of goodwill and other acquired intangible assets for public companies. The International Accounting Standards Board IASB also is considering improving the disclosures for goodwill, but it wants to keep the same reporting rules. Here are the details.
Goodwill is typically associated with the premium the buyer of a business or asset pays over its fair value. The value of goodwill is determined by deducting, from the cost to buy a business, the fair value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase. Investors are interested in goodwill because it enables them to see how an acquisition fared in the long run.
Under U. Then, it is included in the balance sheet. If there is an impairment, the balance of goodwill cannot be recorded as less than zero as a negative.
Testing for impairment is complex. It can involve things such as performing a discounted cash flow analysis of expected cash flows from patents, for instance. The idea behind the treatment of goodwill is that the value of a solid ongoing business with a lot of franchise value rarely declines.
Let's take a look at past goodwill treatment. Consider The Hershey Company, which has made generations of investors wealthy. The acquisition of Reese's into Hershey allowed for economies of scale the company didn't previously have.
This allowed for higher returns on capital. Far from being impaired, the real economic goodwill doesn't show up on the balance sheet. It is now much higher than it was at the time of the acquisition. This acquisition took place under old rules for goodwill. That means that Hershey doesn't carry any goodwill for it. However, if Hershey were to acquire Reese's in the current market, there would be several intangibles to be accounted for. As a value investor, proper goodwill accounting helps ensures that companies engaging in large acquisitions won't artificially depress earnings per share.
Older accounting systems caused the reported net income applicable to common shares to be understated relative to owner earnings. Current goodwill accounting helps smooth out quirks in specific sectors and industries ; otherwise, they may be able to make their shares look much more expensive than they were. Proper accounting methods make it easier to compare businesses across industries.
Financial Accounting Standards Board. You're also buying that company's intangibles, such as its name and reputation, its customer base, and the expertise of its employees. These intangibles have value, but "employees' knowledge" and "customer loyalty" won't appear anywhere on a balance sheet.
Companies can and do sometimes overpay for acquisitions, and overpayment does translate into goodwill, but goodwill itself is not evidence of overpayment. Goodwill routinely arises in business combinations. Your company might buy a firm that already has goodwill on its own balance sheet -- the result of an earlier purchase by that firm.
That doesn't really matter, because during balance sheet consolidation you essentially ignore the purchased company's goodwill and proceed as if it never existed. If the goodwill amount is written down after the acquisition, it could indicate that the buyout is not working out as planned. In short, goodwill impairment is a message to the markets that the value of the acquired assets has fallen below the amount that the company initially paid.
Financial Accounting Standards Board. Accessed April 22, Financial Statements. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses.
0コメント