Nguyet Nguyen
BBUS 503
Exam 1
Goodwill and impairment test
As a result of increased number of merger and acquisition (M&A) over the years, there is nothing that companies feel pains more than controversial goodwill accounting. Goodwill is a special asset that only exists when an acquisition takes place. So why would firms choose to make deals over M&A and create headache? Usually, companies have options to grow internally through making better operation or diverse investment projects, but more often companies choose to expand externally to create synergy value. Companies agrees to pay more than a company’s perceived fair market value by little premium or even high premium to obtain control over the net assets, it is betting on the potential growth of the purchased companies. M&As are very complex and high risk processes due to many aspects.
What is goodwill?
According to Hoyle (2013), additional amount paid in excess of
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And goodwill accounting has been the same. Historically, FASB has been issued different guideline of how to account for and record goodwill on the balance sheet, as well as different method to improve financial report over time. The guidance has been revised to help better practice. In 1970, APB issued Opinion No.17, which required all entities to amortize its goodwill over a period less than or equal to 40 years. On June 2001, the FASB issued SFAS 141/142 that prohibits amortization of goodwill and required at least annually impairment test. In other words, impairment charge is a terminology for writing down worthless goodwill to recoverable amount through the income statement. The useful life of goodwill now is considered indefinite. Al-Khadash and Y.Salah (2009) defined that impairment exists when the carrying amount of goodwill exceeds its fair value and is non recoverable, that is the book value is larger than the undiscounted cash flows expected from the goodwill’s use and the eventual
As a paving company Jim Turin & Sons, Inc. purchases asphalt from its supplier. Jim has worked it out with the manufacturing company to deliver the material hours before the job since the properties of the asphalt may render it useless if delivered too soon. “Once a job is completed, [Jim Turin & Sons, Inc.] is generally paid within 10 to 30 days of billing” (Justia, 2000).
Goodwill was first founded in 1902 in Boston by a Methodist minister, Rev. Edgar J. Helms (Goodwill, 2015). He collected used goods and clothes from the wealthy areas around the city and hired the underprivileged to restore and repair the used items (Goodwill, 2015). The restored goods were then sold or donated to the poor workers who mended them (Goodwill, 2015). This was the foundation of today 's $4 billion nonprofit of the Goodwill Industries that is responsible for providing training and rehabilitation for people with limited access to employment (Goodwill, 2015). Henceforth, the mission of the Goodwill industries of South Central California (GISCC) was established.
The carrying value of goodwill and many other intangible assets was 28.1 billion and 9.8 billion as of December 31,2014. Goodwill unswervingly impacts the asset turnover ratio by cumulative amounts, hence the reason why it is incessantly beneficial to grasp what the adjusted total asset turnover is and how it compares to other businesses within the industry.
Gaughan, P. A., 2002. Mergers, Acquisitions, and Corporate restructuring. 3rd ed.New York: John Wiley & Sons, Inc.
Depreciation helps match the expense of using long lived assets with the revenues the assets helped to produce> what means is that Delta ns Singapore pole Air line depreciates one of its airplanes, it is trying to match the cost of air flight to the revenue that air craft helped to produce. Because air crafts can be an item used for more than one income statement period, Delta and Singapore Airlines don't recognize the air crafts entire cost as an expense immediately. Instead, the companies record them as assets on the balance sheet. Then, in each year of the assets useful life, the companies should recognize a portion of the Item's costs as an expense.
As the business, people put it, to maximize the wealth of shareholders (Peavler, 2016). This could be done by pursuing more of an immediate reason that will realize the shareholders wealth maximization goal. However, this main reason may fail to be realized as most mergers depict negative results.
Lange, Fornaro, and Buttermilch (2015) focused their research on the FASB Accounting Standards Update (ASU) 2011-08, in regards to Intangibles – Goodwill and Other: Testing Goodwill for Impairment. The authors elaborated on how reporting has been done in the past and how the changes made for private companies has helped ease the financial reporting of goodwill. In addition, the authors discussed the definition of a public business entity. This helps to allow private companies to determine the proper way to report their financial
Finally, in 2001, the rules changed under the FAS 141 and 142 to help with the way goodwill will be accounted for. Bussines could now choose to either do an amortization or chose to contribute to impairment testing. Regardless of how companies would choose to do their goodwill, the Irs would still have to take its own precautions on to deal with goodwill. Goodwill can often be tricky in the sense to figure out how much it is really worth. In the case of the AOL Time Warner, it is mostly known as the worst business move in history. This is because these companies started out as being very profitable and were looking to grow in the stock market. Once the market collapse due to the recession the company Time Warner lost lots of money by acquiring AOL. If Time Warner would have known the true value of AOL at the time then this transaction wouldn 't have
Acquisition analysis includes determining consideration transferred, goodwill (or gain on bargain) and fair value of assets at the date of acquisition. When Woolly Ltd purchased Jumper Ltd they paid more than the consideration transferred (fair value of assets less liabilities) of the entity, thus there was goodwill provided. Business combination valuation entries occur when assets or liabilities fair value differs from their carrying amount at the date of acquisition. As Jumper Ltd had assets with a higher fair value than carrying amount there was reasoning for BCVR entries. Intragroup transactions come about through the transfer of assets or liabilities such as inventory or dividends from the subsidiary to the parent or vice versa (within the group).
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Mergers and acquisitions immediately impact organizations with changes in ownership, in ideology, and eventually, in practice. There are multiple reasons, motives, economic forces and institutional factors that can, taken together or in isolation, influence corporate decisions to engage in mergers or acquisitions. The financial risks of merging with or acquiring an organization in another country and how those risks can be mitigated are important issues for corporations to conduct research on. This paper will examine the sensible and dubious reasons for mergers and acquisitions and the benefits and costs of the cash and stock transactions.
Accounting for goodwill within the balance sheet has now been considered to be one of the most controversial aspects of financial reporting as there is no provision within the balance sheet for non-purchased goodwill.
The first two do not require the acquired business unit to be connected with the existing units; the second two depend on connection. Although the concepts are not always mutually exclusive, the way in which they generate value for the corporation is different for each. The portfolio management balances current business activities with new industry acquisitions. Its success is undervalued acquisition meets attractiveness and COE test. The challenges are: increased capital market competition, need for industry specific knowledge, and growth of the company and diversity. The restructuring seeks underdeveloped or sick companies and industries. Its successes are: utilize and pass the three tests and ability to find undervalued companies with growth potential. Its challenges are: restructurer exposed to more risk, time limit for success, hold onto a restructured company, and growing depletion of restructuring pool with increased competition. The transfer of skills involves activities important to competitive advantage. With transferring skills, business activities are similar enough that sharing knowledge would be meaningful. However, skills must be useful to key business activities and must be beyond competitors’ capabilities. The ability to share activities has been a potent basis for corporate strategy because sharing often enhances
The revenue/cost period-: Revenue and the cost period in accounting that the company get income from normal business activities. It’s referred to normal business income that the company got by selling their product and service.
When entrepreneurs plan their business future they will consider how they can increase their business size or profit in a short period. Entrepreneurs may consider growing their business or company by using a merger or an acquisition. These methods can be a speed up tool and a short cut to enlarge their business. (Burns, 2011) Also they can reduce competition, make it easier for entrepreneurs to think about the market and product development and risk reduction. Furthermore, some lesser – known companies can improve their firm’s image and market power by using merger and acquisition with larger firms. However, there may be risks associated with merger and acquisition related to lack of finance and time. (Burns, 2011) This essay will discuss more deeply the advantages and disadvantages of using mergers and acquisitions, showing how it can affect firms and market with the case study.