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Fei Lecture

Good Essays

WHAT IS GOODWILL?

The main method used by businesses to classify assets is to split them into tangible assets, which have a separate existence from the business (examples of which would include buildings, land and machinery), and intangibles which do not. Some clear examples of intangibles include goodwill, patents, research and development expenditure and trademarks. Intangible assets are usually created within the organisation over a period of time, by the company itself, rather than acquired from an external source and are rarely sold off individually – they can normally only be sold in conjunction with associated tangible assets.

Robins, in his essay "FRS 10: Goodwill and Intangible Assets" identifies three sources of goodwill …show more content…

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 realise 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 amortisation of the intangible asset over any period should not be deferred and attributed to any future income.

However, in practise 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 amortising 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

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