Define goodwill and its accounting treatment

Goodwill is the difference between the value of the business as a whole and the aggregate of the
fair value of its net separable assets. It can be either purchased goodwill or non-purchased
goodwill; purchased goodwill is either written off immediately against the reserves or shown as
an intangible non-current asset and amortized, whereas non purchased goodwill is not
maintained in the books.

Evaluate the possible treatment of Goodwill in the accounts of the purchasing company.
In the business purchase, the goodwill arising is the purchased goodwill which can be either
written off against reserves or shown as an intangible non-current asset and amortized.
Case for showing the goodwill
The purchased goodwill is likely to derive benefits over a number of years; therefore the cost
should be spread to give a true and fair view of the accounts.
Writing off goodwill may make the profit unrealistically low and the tax charged unfairly low.
It is an application of accruals concept and recommended practice of IAS
Case against showing the goodwill
Writing off goodwill during a shorter period of time is an application of prudence concept, where
assets and profits should not be overstated.
Goodwill cannot be measured exactly in terms of money; therefore it is not prudent to show in
the books, according to money measurement concept.
Conclusion
Goodwill should be shown in the books and amortized as the benefit received over a number of
years and gives a true and fair view of the accounts.

Evaluate merger/takeover from the point of view of the shareholder.
Positive
The realization profit on the merger of the company and the goodwill valuation (take figures)
The new company will enjoy the benefits of economies of scale, like bulk purchases
The capital will increase, competition reduces, sales increase, market share increases.
The advantages of financial benefits, like large amount of loan can be borrowed at lower interest
rates
Negative
The ownership will be diluted, and the voting power of the shareholder reduces.
The overvaluation of the assets before the merger/takeover
The liquidity of the company should be compared with other company
We do not know the expected market price of the new company
Conclusion
Merger will benefit both the businesses and lead to expansion and growth for the future period.


Evaluate the appropriateness of revaluing the assets and liabilities before takeover
Positive
It would be fair if the assets and liabilities are sold at their correct market values and not
historical book value.
Even if one party is in strong position, the other party does not have to agree for the sale at their
book values.
Negative
The larger and stronger party may be in a position to take advantage and revalue the assets to
their own advantage, which may be lower than market value.
Revaluing the assets and liabilities would be time consuming process, when the buyer can agree
to pay the appropriate goodwill amount.
Professional valuers may be required and they may charge considerable fees
Conclusion
Revaluations will be appropriate because the market value may not be same as the book values,
and it would be more realistic to do so.