As a fast growing pharmaceutical company aiming to continue to experience future growth and more investment through acquisition of new companies such as Austin Power limited, its quite essential to understand what is a good will ,how its acquired, recognized and finally recorded in the financial accounting statement such as the statement of financial position or the balance sheet. Secondly, its also quite important to critically know the accounting standard set under the International Accounting Standards (IAS) on how good will is recognized and acquired. A good will arises where the value of the entity is greater than the value of the assets. This can occur where the organization being acquired is of good reputation in the market compared to the others. It’s an intangible asset but in the recording of the financial statement it’s not categorized as an intangible asset due to the prudence concept of accounting. A good example is in Austin Power limited where, total carrying amount (1790000 dollars) is less than the market value (1990000 dollars), hence the difference (200000 dollars) is the goodwill.
Standards of the Accounting Treatment
Various accounting standards underlie the accounting treatment of the goodwill and its cost. These standard includes the APB opinion No.17, on the intangible assets and the Generally Accepted Accounting Principles (GAAP), In IAS 141.The opinion no 17 accounting standard on the treatment of good will address the individual and even acquired group intangible asset and good will where it require the goodwill to be recognized immediately acquired. The reason behind the good will costs recognized immediately is that investors came to recognize that goodwill serve as an important asset in the business going concern. This standard require also that thee good will cost should be amortized over the number of time in years the business will exist. Some times the goodwill of the Austin Power limited may be impaired. The impairment losses arising at time of acquisition should also be recognized and charged in apportioned manner over the number of the years the business will operate as a going concern in the operating income. This means that if the business will exist for 20 years, the goodwill cost of 200000 dollar will be divided buy 20years and thus in the balance sheet we record,10000 dollars in the debit side of the statement under the non current asset section.
In opinion no 17,accounting standard, goodwill and other intangible asset are termed as a wasting asset with a given finite period and hence their cost should be amortized. However the number of amortization years was limited to 40years only. The amount amortized should be charged to the income if its impairment loss. The intangible assets with infinite life span are the one held under the ceiling period of 40 years. As previous accounting standards provide little information on the testing of the good will impairment, the opinion no17 accounting standard helped the accountant to test it, by first creating a fair value reporting system. From the fir value obtained it was easy now to test for the impairment on the goodwill cost.
For those, goodwill that are not testable for impairment, it was agreed that the cost or the fair value should be compare to the recorded value of the goodwill annually. Those goodwill are also not amortizable hence not testable. Lastly these standards require that full information disclosure of the goodwill should be made at the end of the recording in the financial statement for users to understand the statements accounting treatments.
The second accounting standards applicable in the accounting treatments of the goodwill cost are Generally Accepted Accounting Principles (GAAP) that states that the Good will cost should not be amortized. The standards were introduced in June 2001 and many companies objected to use the issue of amortizing good will cost over the number of useful life. As a result the International Financial Reporting Standards9 (IFRS) removed the amortization. Instead of the companies amortizing the goodwill and testing for the impairment, the companies are required to determine the fair value of the asset through discounting the present value of the future cash flow. The value obtained should then be compared to the carrying value to determine the good will cost. The good will value obtained was to be adjusted such that the fair value equals the carrying value. If there is a good will impairment loss, it’s charged in the income statement while the balance after deduction is recorded in the balance sheet. In case of the business become insolvent its vital to deduct the good will carrying amount from the remaining equity share values because the goodwill has no resale value, hence Zanadriana limited should treat its goodwill this way after recognition.
The main advantage of this treatment is that it will help the organization in financially reporting of the Austin Power limited in the financial statement and thus eventually help to improve the economic value of the property in future. In addition to that these cost treatment will help the users such as the shareholders in the understanding the financial statement and eventually agitated to invest more in the company. On the recognition of the goodwill of the goodwill the can must understand that it’s improving the asset value of the company but it has no cash value. Incase of termination of the company its essential to ensure the realization of the good will as it add the value of the company.
The zanadriana limited should also know that the ten top ranking employees for the intangible asset and hence the 4000000 dollars per annum can be recognized as part of the non current section of the balance sheet as under the opinion no.17 of the intangible accounting standard. Intangible assets of the company should be realized on the termination of the company as they also behave as part of the goodwill. However it should be noted that just like the good will it has no monetary value and hence add no cash value to the company.
Thus in conclusion the Zanadriana Company should recognize and treat the good will of the 200000 dollars as a good will and thus they should record the costs incurred as mentioned above in the accounting standards discussed. However it’s important to note that under the opinion no 17 accounting standard then the cost is apportioned on the number of years the asset will exist. A limit of just 40 years is given for such assets. Lastly and not the least the employees should be treated to be part of the organizations intangible assets, however, they must be earning the organization a greater reputation.
Thank in advance for that consultation and it’s my hope that the information given here will be hinder full to you, your organization and even to the rest of the organizations stakeholders.