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True. Purchased goodwill should be included in the balance sheet as an intangible Asset and should be written off in the statement of profit and loss over the period of 5 years or over the life of the asset as the case maybe.
Purchase goodwill should be included in the balance sheet as an intangible asset.
Answer is True
Accounting for goodwill within the balance sheet has now been considered to be one of the most controversial aspects of financial reporting as there is no provision within the balance sheet for non-purchased goodwill.
Goodwill may be classified into
Purchased goodwill and
Non-purchased goodwill
Purchased Goodwill arises from the acquisition of an existing business, while non-purchased goodwill has been built-up over time and cannot be verified objectively.
The fact then, that this intangible asset cannot be included in the balance sheet supports the accounting allowances made for purchased goodwill in FRS 10, published in 1997 which stated:
Internally generated intangibles should only be recognized where they have a readily ascertainable market value.
Goodwill arises is calculated as the difference between the value of the business as a whole and the aggregate of the fair' values of its various identifiable assets both tangible and intangible. Prior to the introduction of FRS10, its predecessor SSAP 22 prohibited any accounting entries in respect of non-purchased goodwill - and for purchased goodwill, allowed two methods.
Writing off goodwill immediately to reserves under this method, goodwill would never be shown as an asset in the balance sheet.
Carry goodwill as an intangible fixed asset, to be amortized over its estimated useful life. It was not allowable to carry goodwill at cost indefinitely.
By immediately writing off purchased goodwill the company makes the treatment of goodwill equitable throughout the company. As inherent goodwill is not shown as a direct asset in the usual balance sheet it seems contradictory and inconsistent to record purchased goodwill. In addition, as it is not possible to realize goodwill independently of the company and it cannot be attributed a capital worth in a liquidation it seems unrealistic to record goodwill as an asset in the balance sheet. This would also suggest that amortization of the intangible asset over any period should not be deferred and attributed to any future income.
However, in practice the immediate write-off to reserves is not altogether straightforward. As the goodwill has already been allocated an economic value for the purposes of the company sale it is difficult to argue that purchased goodwill is not an asset. The immediate writing off the amount to reserves ignores the existence of purchased goodwill. As outlined by Robins, it is also "inconsistent to charge expenses incurred for building up inherent goodwill to the profit and loss account and to write off purchased goodwill against the reserves" By amortizing the intangible fixed asset through the profit and loss account either over its "economic useful life" or over a specific number of years, the goodwill can be treated as an asset and can be referenced as a cost incurred in the anticipation of future earnings. It would appear to make more sense if purchased goodwill were regarded as an asset for which consideration was paid which does not lose its value over time although this is not acceptable under current accounting practices.
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