The Exposure draft on Accounting for goodwill In Australia was issued in early 80s i. e. May 1983 which was consequently improved and issued as Australian Accounting standard as AAS18. This AAS18 was issued on March 1984 but before this standard there is very modest regulation or guidance for the treatment of goodwill in Australia and at that time goodwill is treated as fixed assets. In the past goodwill was treated in many ways: goodwill is written off completely against reserve or profit immediately or it is separately deducted from shareholders equity.
[] According to AASB 1013 goodwill is treated as asset only if it satisfies the following criteria of assets. i. e. (a) It is probable that the future benefits embodied in the Unidentifiable assets will eventuate; and (b) It possesses a cost or other value that can be measured Reliably. [] AAS18 also states that goodwill that comprises the future benefits from unidentifiable assets because of its nature and it is not usually recorded separately in the accounts.
The Accounting standard AASB1013 also classify between the internally generated and purchased goodwill and how these goodwill are treated. As both purchased and internally generated goodwill give rise to economic benefits, which is the one of the criteria of recognizing the asset but only purchase goodwill is recognized as an asset. ‘This is principally because of the difficulty, or impossibility, of identifying the events or transactions, which contribute to the overall goodwill of the entity.
Even if these were identifiable, the extent to which they generate future benefits and the value of such benefits are not usually capable of being measured reliably. Internally generated goodwill, which is not recognized as an asset will either go completely unrecognized or will be recognized as an expense. “[] And another reason is a management can manipulate the internally generated goodwill because it is in the control of the management of the entity.
The purchased goodwill, which also give rise to economic future benefit and recognized as an asset of the firm. Therefore this asset (Goodwill) is to be amortized over a maximum of twenty years on straight line method and recognized as an expense in P&L a/c it is assumed that the benefits are likely to be received maximum unto 20 years and every year the unamortized value of goodwill should be reviewed on each reporting date and treated as an expense in profit and loss account and the purchase goodwill must not be revalued.
Purchased goodwill can be measured more reliably, on the basis of the amount paid for it, than can internally generated goodwill which is not usually capable of being measured reliably. Consequently, the accounting treatment for purchased goodwill differs from that specified for internally generated goodwill. [] Even with clearly specified rule mentioned in AASB1013 it is truly mentioned “despite clear restriction, the accounting standards give management considerable discretion as to the rate by which purchased goodwill is amortized, and the actual rate used is largely at the whim of directors.
“[] The standard also clearly specify how the Discount that arises from purchase consideration which is less then or below the fair value will be treated under AASB1013. In case of discount the value of non-monetary assets are to be reduced. For Example Net Identifiable Assets (Mkt Value) $5,00,000 Price paid to Acquire the Above Assets $4,75,000 The price paid to acquire the unidentifiable assets (Discount) ($25,000) The accounting standard AASB1013 clearly specify the accounting treatment of such discount as:
‘Must be accounted for by proportionately the fair value of the non-monetary assets acquired, until the discount is eliminated. Where, after reducing to zero the recorded amount of the non-monetary assets acquired, a discount balance remains it must be recognized as revenue in the profit and loss account. ” [] The relevant standard for Treatment of goodwill under ISAC is IAS 38. The International Accounting Standards Committee based in UK and in July 1998 approved the IAS38, regarding Intangible Assets and became operative for financial statement that’s starts from July 1, 1999.
The IAS 38 basically applies to all intangible assets except the financial assets (already mentioned before) and the intangible assets that fulfill the criteria of asset, must be recognized at cost. The current standard IAS38 replace the previous Standards IAS 4 & IAS 9, which states about the amortization of intangible assets and R&D Costs. Some of the key issues of IAS 38 are as below: 1. The International accounting standard IAS 38 state that internally generated goodwill and other assets such as brands, publishing titles, customer lists are not to be accepted as assets.
2. The IAS38 also states that the majority of acquired intangibles cannot be revalued upwards. The reason is as there is no active market (buyers and sellers are readily available) for such assets. 3. Both The standards IAS 38 and IAS 22 require that intangible assets are to be amortized on a systematic basis over the best estimate of their useful lives 4. The standard also states that amortization period and method should be reviewed annually and as well as the impairment test applies to intangible assets.
The standard IAS36 relates to impairment. If the amortization period exceeds the period of 20 years or the intangible is not ready for use then there is compulsory Impairment test applies and also there is need of special disclosures. As Goodwill has no definite life hence under the standard it should not Amortized, and require a further thorough and complex impairment testing. (Detail for this impairment test is under IAS36) 5. The IAS38. 63 states that Intangible assets should be carried at cost less any amortization and impairment losses.