As it was required, I analyzed the effects of the acquisition on the combined company’s financial statement, focusing on the company’s goodwill accounting. The main problem that must be considered is the King Company’s acquisition of a smaller company and how its goodwill impacts the company’s financial statements. The worse considerations of the acquisition are as follows, first, goodwill influence is going to affect the synergies in selling and distributional functions, second, goodwill accounting will affect greatly the earnings in the future and goodwill amortization will be a burden after the acquisition. Another opinion is that goodwill accounting has been changed and there is no risk. The research should also address the consolidated and subsidiary level where goodwill testing for impairment should be conducted. The problem that should be highlighted is whether goodwill after the impairment test should be recognized at the consolidated or subsidiary level.
Accounting literature that addresses goodwill and other intangible assets
Financial Accounting Standards Board is the main accounting literature source where the information for goodwill and other intangible assets may be found. To be specific, it is necessary to stress that for the specific search for information about goodwill and other intangible assets it is better to consult the following sections:
- 805-10-65 (sections 3 and 4) highlight the main idea of the transition provisions for goodwill and other intangible assets mentioned in the Financial Accounting Standards Board statements.
- 980-350-35 (from 1 to 5), the problem of goodwill amortization and long-term power sales contracts is discussed.
- 350-20-35 (sections from 1 to 61) describes overall accounting for goodwill, two steps for recognition and measurement of an impairment loss, the process of determination of the implied fair value of goodwill and its deferred income tax, the process of determination of the fair value of a reporting unit with the same deferred income tax, assigning goodwill for reporting units, and the cases when goodwill should be tested for impairment (by a subsidiary and when a noncontrolling interest exists).
- 805-30-30 paragraph (sections from 1 to 13) sheds light on the measurement of goodwill and the reassessment of the measurement if required in a bargain purchase.
- 805-10-20 represents a Business combination overall glossary full of accounting terminology which helps to understand the information about goodwill.
- 805-10-25 paragraph (from 1 to 23) just partially touches the problem of goodwill. Still, the information helps to understand the notion deeper as it deals with the financial statements.
805-10-20. The definition of the term goodwill is presented in the Business combination overall glossary that states that goodwill is “the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed” (805-10-20 05:37p). The term goodwill is lighted on in detail in section 805-30-30-1, where goodwill is described from the point of view of the acquirer. The definition of goodwill from this point of view may be figured out as follows, goodwill is measured as the excess of the aggregate of acquisition-date fair value, “the fair value of any noncontrolling interest in the acquire”, and the equity interest in the acquire over “the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed and measured (805-30-30-1 05:35p). Furthermore, the goodwill problem is perfectly explained in transitional guidelines 805-10-65-1 (from December 15, 2008). Goodwill is highlighted from the side of a purchase business contribution accounting. The section defines the provisions for goodwill and other intangible assets necessary in the case of the business combination.
Amortization of goodwill
980-350-35-1, 980-350-35-2, and 350-20-35-1 paragraphs. Those paragraphs strictly define that “goodwill shall not be amortized” (350-20-35-1 05:14p). The amortization in the case of goodwill should be substituted by the testing got the impairment. Still, the standards board recognizes another variant, where the goodwill may be amortized (only by the approbation of a regulator and only over a specific period of time as an exception).
If the regulator permits all or a portion of goodwill to be amortized over a specific time period as an allowable cost for rate-making purposes, the regulator’s action provides reasonable assurance of the existence of a regulatory asset. That regulatory asset would then be amortized for financial reporting purposes over the period during which it will be allowed for rate-making purposes (980-350-35-2 05:13p).
In other cases, according to this section, goodwill is not the subject for amortization. The measurement and accounting for goodwill should be conducted in accordance with the guidelines and rules stated in topic 350 of the Financial Accounting Standards Board. Goodwill may never be measured directly, that is necessary for amortization.
Goodwill testing for impairment either at the consolidated level or at the subsidiary level
The 350-20-35-33 paragraph through 35-46 accomplishes the guidelines devoted to the subsidiary and consolidation relationships regulation. The main idea of the question is whether goodwill, once being recognized as a subsidiary, should be tested for impartment either at the subsidiary or consolidated level. The section mentioned above states strictly that in case goodwill is recognized “as a public or nonpublic subsidiary (subsidiary goodwill) in its separate financial statements that are prepared in accordance with generally accepted accounting principles” (350-20-35-48 05:28p) are aimed at being regulated only by the paragraph mentioned above. The section answers the offered question identifying that subsidiary goodwill must be tested for impairment not at the consolidating level, but at the subsidiary level. It is crucial to use the subsidiary’s reporting units while testing. To understand the main direction for the testing, it is crucial to use the quote from the paragraph,
If a goodwill impairment loss is recognized at the subsidiary level, goodwill of the reporting unit or units (at the higher consolidated level) in which the subsidiary’s reporting unit with impaired goodwill resides must be tested for impairment if that gave rise to the loss at the subsidiary level would more likely than not reduce the fair value of the reporting unit (as the higher consolidated level) below its carrying amount (350-20-35-48 05:28p).
Thus, there is a possibility that goodwill may be considered at the different from subsidiary level, at the consolidating level. Such affair development is possible only in the case while the testing for impairment (the reporting unit at the higher level) goodwill impairment loss is considered at the consolidated level. It is crucial to remember that the testing for impairment may be accomplished on an annual basis and between them, as accentuated in paragraphs 350-20-35-28.
Furthermore, it is known that goodwill is unable to generate cash inflows and because of this, the testing for impairment should be conducted. It is crucial to test goodwill for impairment at the lowest level, where it is monitored by management. The goodwill testing for impairment should be completed in two steps. The first step is aimed at identifying potential impairment. The main procedure at this level is the comparison of “the fail value of a reporting unit with the carrying amount, including goodwill” (350-20-35 05:25p). The second step is directed at measuring the impairment loss amount of goodwill that is under the consideration.
The paragraphs from 350-20-35-28 to 350-20-35-32 discuss in detail goodwill testing for impairment of a reporting unit annually and between annual tests. The annual goodwill test for impairment should be done at one and the same time during the fiscal year every 12 months.
The goodwill testing for impairment between annual tests should be accomplished in the following cases, when the harmful changes occurred in business climate or in legal factors, when a regulator provided a hazardous action or assessment, in case of anticipated competition, when the key staff is lost, “a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of” (350-20-35-30 05:26), when the testing for recoverability of a crucial asset group is accomplished, when goodwill impairment is considered to be lost in the financial statements (350-20-35-30 05:26).
There are some situations when goodwill testing for impairment may be avoided. Instead, the fair value of the reporting unit is transferred from one year to the next one. There are not many situations when it may occur, namely, (1) there were no significant changes in the assets and liabilities, (2) the latest fair value identification resulted in exceeding of the carrying amount by a substantial margin, (3) “a current fair value determination would be less than the current carrying amount” (350-20-35-29 05:26).
Conclusions and Recommendations
In conclusion, the research conducted on a problem was thorough and effective. The answers to the desired questions were obtained. On the basis of the Financial Accounting Standards Board, the main questions that had to be considered were lighted on. Thus, goodwill is defined as an asset that the purchasing company should recognize and add to the purchasing price of the company while acquisition. One more point was considered, goodwill is not the subject for amortization as stated in the Financial Accounting Standards Board document and it should be tested for impairment. Furthermore, it was concluded that when goodwill is recognized by a subsidiary, the testing for impairment should be conducted at the subsidiary level. Still, there is one exception.
I suppose that after the acquisition of a smaller company, the King Company should conduct its goodwill testing for impairment. It is possible to reject the claims of some of the senior staff about the negative influence of goodwill amortization on future earnings due to the fact that it is not the subject of amortization. Furthermore, it is true that goodwill accounting has changed. It is not considered as the prudent value anymore, otherwise, it is understood as an asset that should be measured in accordance with specific rules and requirements.
“Goodwill impairment testing by a subsidiary.” Financial Accounting Standards Board, 2009. Web. .
“Overall accounting for goodwill.” Financial Accounting Standards Board, 2009. Web.
“Business combination overall glossary”. Financial Accounting Standards Board, 2009. Web.
“Measurement of good will.” Financial Accounting Standards Board, 2009. Web.
“Amortization of goodwill.” Financial Accounting Standards Board, 2009. Web.