Goodwill

Goodwill is an asset representing future economic benefits arising from other assets acquired in a business combination or an acquisition by a non profit entity that are not individually identified and separately recognized (350-20-20 glossary).   Over time goodwill is now considered to be another way of earning.   There are four points that are relevant to forecasting future values of goodwill: The use of too few or too many years may distort projections, trends in earnings should be considered, industry trends are important and overall economic conditions can be significant (CITATION).   Goodwill may also exist at any time however it is only recognized for accounting purposes when it's acquired through the purchase of an existing business.   When we record goodwill it is considered to be an intangible asset.   Goodwill was amortized over its useful life or 40 years (whichever were to come first) .   This was based off of accrual accounting since the company has paid for the goodwill and will possibly generate future income.   Some accountants think that goodwill should be written off when it is acquired however, I would not suggest that.   Immediate write-offs for goodwill may be misleading to investors.   Immediately writing off goodwill would result in a misleading impact on your financial ratios.   Future profit may also be inflated.   SFAS No. 142 changed the accounting treatment for the amortization period of goodwill from not exceeding 40 years to having it undergo annual testing for impairment.   SFAS No. 142 tests goodwill impairment with this two step process:
1. Compare the fair value of the reporting unit to its carrying value. In the
event fair value exceeds carrying value, no further testing is required. However,
if the carrying value of the reporting unit exceeds its fair value, step 2
is required.
2. Calculate the implied fair value of goodwill by measuring the fair value of
the net assets other than goodwill and subtracting this amount from the fair... [continues]

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