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ISSUES ON RECOGNITION, MEASUREMENT AND
IMPAIRMENT OF GOODWILL

LECTURER CRISTINA BUNEA-BONTAS, PH.D.

ASSISTANT MIHAELA PETRE, PH.D. GRADUANT
“CONSTANTIN BRANCOVEANU” UNIVERSITY, PITESTI
THE FACULTY OF MANAGEMENT MARKETING OF ECONOMIC BUSINESS, BRAILA

Abstract:

Investors and their advisers have to asses how the activities of the acquirer and its
acquired business develop following a business combination. Due to a complexity of
business activities this is a challenging exercise. Certainly, one of the major
challenge concerns the goodwill. Is it an asset? How can it be measured? Which are
the implications on fair image of financial position and performances? Therefore,
the accounting treatment of goodwill involves applying professional judgment in
terms of meeting criteria for its recognition as an intangible asset, but also related
to the initial measurement and its impairment. IFRS 3 (Revised) “Business
Combinations” will create significant changes in accounting for goodwill, and
further more, for business combinations.

Keywords: goodwill, fair value, impairment loss, full goodwill, non-controlling
interest

JEL classification: M410 Accounting

Companies use their resources or assume debts in order to purchase or to
generate internal items such as licenses, intellectual properties, trademarks, import
quotas, franchises, devoted customers, knowledge about the market, contracts with
distributors and other resources which are intangible as well.

Intangible assets are identifiable non-monetary assets, without physical
substance, held for use for the production of goods or services, to be rented to third
parties or be used for administrative purposes. Recognition of an element of intangible
asset requires the company to demonstrate that the item meets the definition above: to
have identifiable character, to be controlled, to obtain future economic benefits and can
to be able to asses at a reliable cost.

Items such as goodwill, trademarks, licenses, customer lists, which are generated
inside are not recognized as intangible assets. Even if, in order to generate such items,
companies incurred such expenses to generate future economic benefits, these expenses
do not lead to an intangible asset which meets the criteria for recognition.

Initial recognition and measurement of goodwill based on IFRS 3 (2004)

Internally generated goodwill is not recognized as an asset, because it's not a
controlled identifiable resource, which may be valued at a reliable cost by the
undertaking. Referring to International Accounting Standard IAS 38 “Intangible assets”,
it argues that differences between the market value of a company and the carrying
amount of its net identifiable assets at a certain time, may take into account a whole
range of factors affecting the company. Such differences can not be regarded as
representing the cost of intangible assets controlled by the company.

Instead, the goodwill which results from business combinations must be
recognized as an asset in the balance sheet of the purchaser. The concept of goodwill is
approached through the International Financial Reporting Standard IFRS 3 “Business
combination”.



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