Background on goodwill impairment; Accounting Requirements (Essay Sample)

Background on Goodwill Impairment Accounting Requirements Name Institution overview In recognition of complexity involved, AICPA issued an AICPA accounting valuation guideline for testing goodwill impairment. The guide dated November 2013 discusses aspects surrounding the assessment and testing goodwill impairment (PWC, 2013). Despite demystification of processes of testing goodwill for impairment, firms are still faced with difficulties. It is imperative to note that this guide is not an amendment of existing guidelines. IFRS requires that good will be amortized subsequent to the annual calculation to determine whether an impairment is required. The management of the subject company is responsible for such valuation. The management determines the fair market value is lower that the historical values (What he good will was purchased for), then the goodwill is amortized. The rise in the value of goodwill does not affect the books of accounts. Before the GAAP, (FAS 141) in 2001, goodwill evaluation did not consider the direction to which money moved. Pooling of interest method was used. Goodwill no longer amortizes under GAAP (FAS 142). The option of pooling of interest was excluded in the determination of the goodwill by the FASB (Financial Accounting Standard Board) as a compromise. Goodwill is now amortized in accordance with the requirement of GAAP Standards. At the verge of insolvency a firm will exclude goodwill in its books because it will not have any resale value. This is because the assets of companies are broken down and auctioned during liquidation. Goodwill is therefore not attached to any particular asset but an operational company. After impairment, the new value is recorded in the statements of financial positions while the loss is posted to financial performance statements. The classic method of deduction of goodwill yearly for 40 year no longer applies. A firm is therefore required to compute its good will annually and amortize it whenever necessary. IAS 36 upholds and explains the need for a company to conduct asset impairment test. Impairment tests seek to ensure that an organization does not carry its assets at a value higher than the recoverable. This is for the purpose of security and decisions relating to the closure of companies.Goodwill Valuation GAAP standards requires that a company should determine its fair value of financial reporting unit using its current value of future cash flow and compare it to its book value of assets, goodwill included fewer liabilities. If the fair value is less than carrying (impaired) value, then Goodwill will be reduced to the point where carrying value equal the fair value.Application of ASC 820 Accounting standard 820, (ASC 820), defines fair value as the best market price that is obtained as a result of participation and best use (PWC, 2013). It also provides framework and guideline for measuring fair value. It is critical that a relevant fair value is ascertained before it is compared with the carrying cost. Firms at this point may consult market experts and valuers fro an appropriate value (PWC, 2013). Fair value is a market-based measurement that takes no consideration to entity measures. Fair value is rather focused on the cost at which an asset of liability can be transferred to other indecent players of the market.A critical analysis of accounting for goodwill for ALS LIMITED Good valuation is dependent forecast that ought to be critically interrogated least poor decision may be made regarding amortization of goodwill. As Lucy Huajing et al. concluded after their inquiry, that analysts do not give accurate predictions on quarters that do not report impairments. The magnitude of impairment charges negatively correlates with forecasting accuracy. However impairment is positively associated with forecast dispersion (Lucy Huajing, et al., 2014) Adverse effects of disability can be abated by audit monitoring and specialization in accounting and auditing. Goodwill determination in ALS Limited is surrounded by complexities and variables that are hard to judge accurately. Since the accuracy of the forecast of cash flow and disclosure are relied upon, there is less probability that an accurate value of goodwill can be arrived at. Goodwill is treated as a whole that create a worse situation compared to when it was classified to purchased and internally generated. Recognition of intangible assets not as internally generated goodwill further increase the success of ascertaining good will to depend on disclosure. There is a possibility of classifying elements of goodwill as other intangible assets even after disclosure Recommendation ALS Limited should not consider the amortization of goodwill. Intangible assets that are generated during the business process have to be critically analyzed to ensure that it is not part of a good will. ALS Limited should also consider classifying good will between purchased and internally generated has they have different effects on business position and performance. A mechanism of identification of non-tangible assets needs to be established to ensure disclosure and clear distinction.Rational Goodwill valuation has much complexities and variables involved but yet a simple definition; the difference between the value of a firm and the balance from liabilities and assets. Goodwill is determined and amortized to ensure that a company does not carry a value that is higher than its disposable assets. The recognition of multiple (some indefinite) intangible assets will considerably understate internally generated goodwill. The resultant value of goodwill will therefore be lower than that what it should be especially if aspects that should be part internally generated goodwill is classified as a different asset.Accounting for goodwill impairment Goodwill concept is commonly applicable during acquisitions. Goodwill is treated as a long-term asset and usually posted to the balance sheet. IFRS requires that, instead of deducting some value from goodwill for 40 years, it is put to the regular test for impairment. Amortization or depreciation is not the subjects for application but discrepancies may call for the decision of amortizing current goodwill to ensure that the carrying value of the company does not exceed what could be obtained in case of liquidation. Goodwill impairment is based on a reporting. The process of classical valuation is as follows; a reporting unit in question is identified. A fair market value is estimated. The input for estimation may include historical data and current transactions provided they are comparable. The market value of such particular reporting unit is estimated and compared to its carrying cost (which is the cost at which it was purchased). If the carrying cost is higher than the estimated market value, the bank amortization is necessary. Amortization is a negative review of goodwill.Goodwill impairment critic The determination of goodwill whichever the method used will always result in the same thing. The value of the company if it were to be sold while operational, less the positive difference between assets and liabilities is the good will such particular company. This means if the firm worth some value say X, but the actual value of assets that can be liquidated les...