AFA 717 Lecture Notes - Lecture 9: Intangible Asset, Write-Off
• Goodwill is a common intangible asset
• It represents the value associated with favourable characteristics of a firm that result in earnings
in excess of those expected from its identifiable assets
• It is internally generated and is recorded only when purchased, along with identifiable tangible
and intangible assets that constitute an operating unit.
• It typically cannot be separated from those identifiable assets
• Examples of factors that cause enhanced financial performance are:
• a superior management team;
• an outstanding sales organization;
• especially effective advertising;
• exceptionally good labour relations;
• An unusually good reputation for total quality; and
• highly advantageous strategic location.
• The value of goodwill is calculated indirectly in an acquisition of a business unit, by following
these steps:
• Establish the total cost of the acquisition (1)
• Establish the fair value of all identifiable assets and liabilities assumed (2)
• Cost less fair value of net identifiable assets is goodwill
• Cost of acquisition (1) – Fair value of net assets acquired (2) = Goodwill
• When the fair market value of the identifiable net assets acquired is higher than the purchase
price, the acquiring firm has made what is sometimes called a bargain purchase → this is
negative goodwill
• the assets are reassessed to see if a write-down would be appropriate
• any remaining amount is reported as a gain in net income
• Cost model – at date of derecognition:
• Depreciate up to date;
• Accrue any related costs – insurance, property taxes
• Remove original cost and accumulated depreciation
• Difference between book value and amounts received = gain or loss
• Reported separately in income from continuing operations
find more resources at oneclass.com
find more resources at oneclass.com
