Goowill

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Intangible assets

At the end of this lecture you should be able to:

* Explain what goodwill is
* Explain the differences between purchase and non-purchased goodwill * Discuss evaluation and possible ways of accounting for goodwill * Explain and discuss the requirements of IFRS for ‘accounting for goodwill’ * Explain and discuss the requirement for Research and Development

Intangible assets

The IASB defines in IAS38 an intangible asset as:

An identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services. In the EU Fourth Directive, on which most of the European laws are based contains the following list in the balance sheet formats.

Cost of research and development
Patents
Licences
Trade marks
Goodwill

Goodwill

Definition: The difference between the value of the business as a whole and the fair value of its separable net assets.

Why does goodwill exist ?
There are many items of benefit to a business that do not qualify the definition of an asset and are not included in the accounts. Examples include

Goodwill is in existence at all times but it is difficult to measure it and put a value on it . They are not recognised on the Balance Sheet as they do not arise from an accounting transactions . Their value is independent of the amount spent.

They cannot be sold separately without selling the business.

Types of goodwill

There are two types of goodwill

Inherent goodwill

Purchased goodwill

Purchased goodwill arises as a result of a transaction: when one company buys another company . The acquirer may pay more or less than the value of the identifiable assets and liabilities. The difference is goodwill arising from an accounting transaction. Non-purchased goodwill or internally generated goodwill is any goodwill other than purchased goodwill.

Goodwill is an accounting anomaly. Every method of accounting results in...
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