A Synopsis of Accounting for Business Combinations
A SYNOPSIS OF ACCOUNTING FOR BUSINESS COMBINATIONS,
INTANGIBLES AND GOODWILL IMPAIRMENT
INTRODUCTION
During the 1980 's and 1990 's a great number of business mergers and acquisitions took place. The generally accepted accounting principles to record the initial transaction and to account for the acquired assets during their estimated useful lives this were well established.
Over time however, users of financial statements began to question whether those principles and practices accurately reflected the market realities regarding the assets, their useful lives and their contribution to a company 's value. In addition, intangible assets have become increasingly more important as an economic resource.
It was apparent that users of financial statements did not accept that goodwill amortization expense provided useful information. They realized that treating goodwill as a wasting asset whose value deteriorates predictably over a fixed period of time ignored the economic realities. Goodwill, in fact, can be replenished and increased in value; alternatively, the value of goodwill can decrease precipitously in a short period of time.
During the 1970’s the FASB had an active project on its agenda to reexamine the accounting for business combinations and acquired intangible assets. However, action on the project was deferred until, in 1981, the Board removed the project from its agenda entirely, to focus on higher priority projects.
In 1986 the Financial Accounting Standards Board (FASB) included the project on business combinations on its agenda. The purpose was to “improve the transparency of accounting and reporting of business combinations, including the accounting for goodwill and other intangible assets.” The FASB’s study confirmed that users of financial statements placed greater emphasis on the goodwill asset reported on the balance sheet, rather than an allocation of goodwill amortization expense reported on the income statement. This
INTANGIBLES AND GOODWILL IMPAIRMENT
INTRODUCTION
During the 1980 's and 1990 's a great number of business mergers and acquisitions took place. The generally accepted accounting principles to record the initial transaction and to account for the acquired assets during their estimated useful lives this were well established.
Over time however, users of financial statements began to question whether those principles and practices accurately reflected the market realities regarding the assets, their useful lives and their contribution to a company 's value. In addition, intangible assets have become increasingly more important as an economic resource.
It was apparent that users of financial statements did not accept that goodwill amortization expense provided useful information. They realized that treating goodwill as a wasting asset whose value deteriorates predictably over a fixed period of time ignored the economic realities. Goodwill, in fact, can be replenished and increased in value; alternatively, the value of goodwill can decrease precipitously in a short period of time.
During the 1970’s the FASB had an active project on its agenda to reexamine the accounting for business combinations and acquired intangible assets. However, action on the project was deferred until, in 1981, the Board removed the project from its agenda entirely, to focus on higher priority projects.
In 1986 the Financial Accounting Standards Board (FASB) included the project on business combinations on its agenda. The purpose was to “improve the transparency of accounting and reporting of business combinations, including the accounting for goodwill and other intangible assets.” The FASB’s study confirmed that users of financial statements placed greater emphasis on the goodwill asset reported on the balance sheet, rather than an allocation of goodwill amortization expense reported on the income statement. This