Valuation of Goodwill
VALUATION AND MANAGEMENT OF GOODWILL IN A BUSINESS.
INTRODUCTION
Goodwill is an intangible element connected with the going concern which include personality, reputation, the company name, convenient and favourable location of the business, quality of merchandise, efficient management, supply and demand for a choice product, affordable prices, efficient labour relations with employees, true and fair view and finally courteous methods of treating customers.
Goodwill is often shown on the accounting books and records and therefore on the balance sheet only when it has been purchased. In the concluded analysis, the real test of existence of goodwill is the ability to earn a rate of return which is higher than it is usually realized in the industry. Some companies write off the cost of goodwill over a period of a few years as a special item on the statement of income. A charge off in the year of acquisition is not considered good practice. If the excess profits which serves as the initial evidence of the existence of goodwill have been stated, the goodwill is written down then the assets or owners’ equity will be understated and will not give a true and accurate position of the company. When the goodwill asset no longer has value the write off corrects the assets and owners’ equity values.
AIMS AND OBJECTIVES OF VALUATING GOODWILL IN A BUSINESS.
AIMS
The International Accounting Standards Board (IASB) regulations states that goodwill should be recognized as a fixed asset and classified as an intangible asset when it is purchased, acquired or merged together in a business combination and to have its accounting value assessed annually for any impairment in value. An impairment loss is written off against profits. Some companies acquire goodwill for the company such as employee skills, customer’s loyalty and the location of business premises and there is no goodwill in its balance sheet therefore the value for such goodwill is not accounted for in the company
INTRODUCTION
Goodwill is an intangible element connected with the going concern which include personality, reputation, the company name, convenient and favourable location of the business, quality of merchandise, efficient management, supply and demand for a choice product, affordable prices, efficient labour relations with employees, true and fair view and finally courteous methods of treating customers.
Goodwill is often shown on the accounting books and records and therefore on the balance sheet only when it has been purchased. In the concluded analysis, the real test of existence of goodwill is the ability to earn a rate of return which is higher than it is usually realized in the industry. Some companies write off the cost of goodwill over a period of a few years as a special item on the statement of income. A charge off in the year of acquisition is not considered good practice. If the excess profits which serves as the initial evidence of the existence of goodwill have been stated, the goodwill is written down then the assets or owners’ equity will be understated and will not give a true and accurate position of the company. When the goodwill asset no longer has value the write off corrects the assets and owners’ equity values.
AIMS AND OBJECTIVES OF VALUATING GOODWILL IN A BUSINESS.
AIMS
The International Accounting Standards Board (IASB) regulations states that goodwill should be recognized as a fixed asset and classified as an intangible asset when it is purchased, acquired or merged together in a business combination and to have its accounting value assessed annually for any impairment in value. An impairment loss is written off against profits. Some companies acquire goodwill for the company such as employee skills, customer’s loyalty and the location of business premises and there is no goodwill in its balance sheet therefore the value for such goodwill is not accounted for in the company
References: 1. Accounting Standards Board (1996), “Measurement of Fixed Intangible Assets”, London. 2. Accounting Standards Board (1995), “Statements of Principles for Financial Reporting”, London. 3. Auditing Practice Board (1995), “Disclosures Relating to Corporate Governance”, Bulletin 95/1, London. 4. Company Reporting (2006), Improving Standards of Financial Reporting Practice, Edinburgh, Issue No 198, Page 3, 4, 13 and 24. 5. Hussey R. and Bishop M. (1993), Corporate Reports, A Guide for Preparers and users, Woodhead-Faulkner Publisers Limited, Hertfordshire 6 7. Laidler J. and Donaghy P. (1998), Understanding UK Annual Reports and Accounts. The Alden Press. Oxford. 8. Lee T. A, (2006), Financial Reporting and Corporate Governance, Scriprint Publishers, West Sussex, England. 9. Mcmullen S. Y, (1979), (Ed), Financial Statements, Forms, Analysis and Interpretation, Richard D. Irwin Print, Illinois, USA. 10. Nobes C. (1989), “ASC puts Goodwill on the Balance Sheet”, Financial Times, 21 December, 1989, England. 11. Stacey G. and Tweedie D. (1989), “Setting a Standard for the Value of Goodwill”, Financial Times, 7 December, 1989, England.