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Answered Same DayDec 20, 2021

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Robert answered on Dec 20 2021
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1. The company has included an amount for goodwill in the accounts.
Describe the concept of goodwill and how it is measured.
Solution:
Goodwill, the most common unidentifiable intangible asset, comes about as the result of a
transaction. It is the “excess of the cost of an acquired enterprise over the sum of identifiable net
assets.” Goodwill, then, is a residual. But the accounting language does not say it is the only
unidentifiable intangible asset. It cannot be, because of the unidentifiable assets developed
internally. For example, a company may have developed a culture of mentoring that encourages
senior executives to impart useful information to younger workers. Suppose that knowledge
sharing has helped the company cut design costs. As a result, the company is more profitable
than its competitors. If this firm were bought, the mentoring culture would implicitly be lumped
into goodwill. In other words, the unidentifiable intangible assets of a firm turn into goodwill if
the firm were to be purchased. At this stage, the assets may remain unidentified and continue to
e treated as goodwill, or, if possible, they will be identified and separated from goodwill.
The goodwill at Ramboll has the value of 5 to 20 years. Goodwill of the company represents the
excess cost of an acquisition plus the cost that is directly attributed to the acquisition over the fair
value of group’s share of the net identifiable asset of the acquired subsidiary in the intangible
assets which is amortized over the given life of the asset. Intangibles, too, may have determinate
useful lives: “The useful life of an intangible asset to an entity is the period over which the asset
is expected to contribute directly or indirectly to the future cash flows of that entity.” The FASB
goes on to describe various economic considerations that would impact the intangible asset's
useful life.
 The expected use of the asset
 Its relationship to the useful lives of other assets
 Legal, regulatory, or contractual provisions that could impact useful life
 The effect of obsolescence, demand, competition, and technological advances
 The level of maintenance expenditures required to obtain the expected future cash
flows from the asset
“If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life
of an intangible asset to the reporting entity, the useful life of the asset shall be considered
indefinite.” (FASB)
The impairment testing for goodwill is a little different for three reasons.
1. It is a test of the goodwill of a reporting unit, not some free-standing piece of goodwill.
2. It requires a two-step process.
3. There are more circumstances or events that would reduce the fair value of a reporting
unit below its ca
ying amount than there are for other unamortizable intangible assets,
and these require impairment testing between annual tests. The FASB states:
“The first step of the goodwill impairment test, used to identify potential impairment, compares
the fair value of a reporting unit with its ca
ying amount, including goodwill…. If the fair value
of a reporting unit exceeds its ca
ying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment test is unnecessary. If the ca
ying amount of a
eporting unit exceeds its fair value, the second step of the goodwill impairment test shall be
performed to measure the amount of impairment loss, if any”. (FASB)
A reporting unit is an operating segment of a company or a component of an operating segment
that constitutes a business “for which discrete financial information is available and segment
management regularly reviews the operating results of that component.” The FASB cares about a
eporting unit because the data available at this level enables managers to allocate goodwill with
more certainty to the...
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