Goodwill

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Submitted By priya1
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Goodwill has long been a controversial subject. Wines and Ferguson (1993) and McCarthy and Schneider (1995) documented the fact that the controversy regarding the accounting for goodwill in US and abroad had existed since the early 1900s. The controversy focused on the recognition of goodwill as an asset, on its treatment and its link to the income statement. A search of the accounting literature yields two definitions of goodwill. One is that goodwill is the excess of purchase price over fair value of the net assets acquired. Alternatively, goodwill is defined as the price paid for excess earnings where excess earnings are defined as the difference between the earnings of the acquired asset over the normal earnings for a similar business. Historically, there are three views on the treatment of goodwill. The first suggests that goodwill should be written off immediately against retained earnings. The second view holds that goodwill is a wasting asset and it should be amortized over a useful life. Further, the amount of goodwill amortized should be allocated to periods where it contributes to company’s earnings. 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.

As outlined in Financial Accounting Standards Board Accounting Standards Codification 350: Intangibles - Goodwill and Other (formerly Statement of Financial Accounting Standards No. 142), Goodwill is “an asset representing future economic benefits arising from other assets acquired in a business combination or an asset acquisition by a not-for-profit entity that are not individually identified and separately recognized” (ASC 805 Glossary). In general terms, the amount of goodwill recognized is the excess of the consideration transferred…...

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