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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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You are auditing the financial records of a company, and you are aware that it has grown quickly in the last few years by acquiring other companies. You look up the disclosure in last year’s annual report which states, “The company amortizes its intangibles over periods ranging from 3 to 15 years.” As you review the company’s records, you find that the company made an acquisition of a “high-tech” company 3 years ago and has not recognized any impairment on the related goodwill. In the last 6 years, the company has made five other acquisitions and has not recognized any impairment related to them. Included in the acquisitions are several patents that are amortized over 9 years and some intangibles with indefinite lives.

Required:

From financial reporting and ethical perspectives, discuss the issues raised by this situation.

To determine

Discuss the issues that are raised by the given situation, from the perspective of financial and ethical reporting.

Explanation

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

Goodwill: Goodwill is the good reputation developed by a company over years. This is recorded as an intangible asset, and is quantified when other company acquires. Goodwill should be recorded only when one company is acquired by another company. Goodwill value would be impaired, if the book value of goodwill is less than fair market value.

From the financial reporting perspective:

  • The policies of the company are within the limitations levied by GAAP. This requires amortization of intangible assets with a limited life, assuming that management has made a meaningful assessment of the life of each intangible.
  • Moreover, the impairment of any intangible assets with an indefinite life or goodwill is not indicated by the company. Therefore, it is understood that the company has followed GAAP, assuming that the company has tested for impairment each year.
  • Though the disclosures of the company are vague, the company satisfies some of the requirements of GAAP, by disclosing the appropriate “line items” in the balance sheet and income statement...

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