Should Internally Developed Goodwill Be Recognized as an Asset?

Should Internally Developed Goodwill Be Recognized as an Asset?

  • Submitted By: amandalq
  • Date Submitted: 12/21/2008 8:33 AM
  • Category: Business
  • Words: 1248
  • Page: 5
  • Views: 1437

Should internally developed goodwill be recognized as an asset?

Since the 90s, the world has gone through a great wave of mergers and acquisitions. Meanwhile goodwill is becoming a focus in the accounting treatment of mergers and acquisitions. In 2006, Chinese Ministry of Finance promulgated a new《Business accounting principle》to perfect the goodwill accounting. It stated that“Goodwill is an no identifiable non-monetary asset possessed or controlled by enterprises which has no physical shape.” According to the difference of source, goodwill is divided into two parts: Purchased goodwill and internally developed goodwill. Purchased goodwill is the difference between the cost of the acquisition and the sum of fair value of identifiable assets and liabilities. Moreover, it is motorized using the straight-line method with no more than 10 years and recorded as expenses in the accounting method. A broader concept of internally developed goodwill is the economic value that an enterprise creates by oneself such as brand, developed markets, managerial talent, labor force, government relations and so on. However, internally developed goodwill is not regulated as an asset to recognize in the new accounting principle. Hence the topic that should internally developed goodwill is recognized as an asset has become a bone of contention in recent years.

At the present time, there is still a great deal of scholars who hold the view that internally developed goodwill cannot be recognized as an asset. There are five reasons to support them as below:
(1) Internally developed goodwill cannot be measured accurately. With regard to internally developed goodwill, it is hard to determine the value without any purchasing behaviors.
(2) Recognizing internally developed goodwill violates reliability principle. The essence of internally developed goodwill is to earn extra profit. However it is hard to forecast the amount of excess earnings in the future....

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