Vol. 3 LM2 Non-Current Assets: Goodwill

Question 1

Concept

If the purchase price is greater than the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired,
the excess amount is recognized as an asset, and described as …

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Answer 1

goodwill

Question 2

Explanation

proponents for recognizing goodwill in financial statements

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Answer 2

assert that goodwill is the present value of excess returns that a company is expected to earn

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Question 3

Explanation

opponents for recognizing goodwill in financial statements

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Answer 3

claim that the prices paid for acquisition often turn out to be based on unrealistic expectations, thereby leading to future write-offs of goodwill

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Question 4

Explanation: according to goodwill proponents

What is the purpose in attempting to calculate the present value of excess returns that a company is expected to earn

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Answer 4

Determining the present value of these excess returns is analogous to determing the present value of future cash flows associated with other assets and projects.

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Question 5

Explain the difference

goodwill vs economic goodwill

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Answer 5

economic goodwill is based on the economic performance of the entity,
whereas;
goodwill is solely an accounting concept that is reported only in the case of acquisitions.

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Question 6

impairment treatment

goodwill

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Answer 6

• It is tested for impairment annually.
• If impaired, an impairment loss is charged against income in the current period.

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Question 7

amortization method

goodwill

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Answer 7

goodwill is not amortized

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Question 8

consequences of

goodwill impairment loss

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Answer 8

• Reduces current earnings
• Reduces total assets
• May actually increase return on assets (net income divided by average total assets) in future periods

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Question 9

recognition requirements

goodwill

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Answer 9

• The Total cost to purchse the target company (the acquiree) is determined.
• The acquiree’s identifiable assets, liabilities, and contingent liabilities are measured at fair value.
• There is an excess of the cost to purchase the the acquiree over the net identifiable assets acquired.

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Question 10

enumerate

techniques for comparing companies due to goodwill uncertainty

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Answer 10

(1) excluding goodwill from balance sheet data used to compute financial ratios;
(2) excluding goodwill impairment losses from income data used to examine operating trends

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