Treatment for goodwill measurement, subsequent to initial recognition
After recognizing the goodwill as an intangible asset, the questions how it will
be depreciated along the time. The accounting practice and theory generally sustain four
divergent solutions for the goodwill accounting treatment, as follows:
(a) Maintaining the goodwill as an asset, without any amortization or
provisioning
Some experts sustain that the value of the goodwill does not decrease in time,
but on the contrary it maintains its value or even grows along its economic life. So,
goodwill is an investment and must be disclosure in the balance sheet without any
amortization. Counterargument: goodwill represents a virtual asset that leads to the
misrepresentation of the real financial position and performance.
(b) Subtracting the goodwill from the owner’s equity
According to this solution, a company accepts to pay an extra-price for acquiring
the assets belonging to another company, when it is estimated that it will obtain future
economic benefits. These future extra-revenues will compensate the extra-payment
made at the acquisition moment. Counterargument: a false image is created, that the
company group has a higher profitability.
(c) Capitalization of the goodwill and making provisions for it, in case that the
acquired assets have depreciated
This solution leads to a similar image like the first one.
(d) Capitalization of the goodwill and its amortization during a period equal to
the useful life of the acquired assets
Some specialists plead for the necessity of depreciating the goodwill, due to its
own elements’ economic nature. Therefore, the goodwill may contain intangible assets
that support depreciation, and which are not separately identifiable, because their cost
cannot be reliable determined. Also, some components of the goodwill (i.e. “managerial
team”, “collective intelligence of the team”) do not have a definite economic life.
Consequently, not amortizing the goodwill does not allow the disclosure of a fair image
of a company’s financial position and performances. The amortization of the goodwill
significantly influences the disclosed financial results of the company.
Consequently, most of the companies take advantage of all these ambiguities
belonging to the various types and uncertainties of theoretical issues, in order to develop
an opportunistic attitude that serves their own perspectives and targets.
Recognizing and measuring goodwill impairment loss based on IFRS 3
(2004)
IFRS 3 “Business combination” requires that goodwill acquired in a business
combination should not be amortized. Based on IAS 36 “Impairment of Assets”, it
should be tested for impairment annually or more frequently, if certain events or
changes in circumstances indicate the possibility of the depreciation.
IASB argues that goodwill is the only item of intangible assets for which
depreciation is very difficult to identify. It does not generate cash flows independently
of other assets or groups of assets and, therefore, its recoverable amount cannot be
measured individually. Accordingly, if there is any indication that goodwill may be
impaired, the recoverable amount is calculated for the cash-generating unit to which it
belongs. This amount is compared with the value of the cash-generating unit and if there
is an impairment loss, it is first allocated to goodwill and then to other assets of the
cash-generating unit.
A cash-generating unit is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or groups
of assets.