Good Write off and BAD goodwill of a Business

Writing off Goodwill

Accounting entries for writing off goodwill

Goodwill Write-off Goodwill acquired in a business combination is considered to have an indefinite life and therefore should not be amortized. The Board’s position is that investors find the amortization charge of little use in evaluating financial performance. In addition, although goodwill may decrease over time, predicting the actual life of goodwill and an appropriate pattern of amortization is extremely difficult. On the other hand, knowing the amount invested in goodwill is important to the investment community. Therefore, income statements are not charged unless goodwill has been impaired. This approach will have a significant impact on the income statements of some companies because goodwill often is the largest intangible asset on a company’s balance sheet. Prior to the new FASB standard, companies were required to amortize this intangible. For example, it is estimated that as a result of the new rules, earnings per share in 2001 will increase 21 percent for International Paper, 16 percent for Johnson Controls, and 30 percent for Pepsi Bottling Group. Some believe that goodwill’s value eventually disappears and therefore that goodwill should be charged to expense over the periods affected. Amortizing goodwill, they argue, provides a better matching of expense with revenues. Others note that the accounting treatment for purchased goodwill and goodwill created internally should be consistent. Goodwill created internally is immediately expensed and does not appear as an asset; the same treatment, they argue, should be accorded purchased goodwill. Even though these arguments may have some merit, the FASB decided that nonamortization of goodwill combined with an adequate impairment test provides the most useful financial information to the investment community.

Negative Goodwill—Badwill Negative

What is negative or bad goodwill arises when the fair value of the assets acquired is higher than the purchase price of the assets. This situation is a result of market imperfection, because the seller would be better off to sell the assets individually than in total. However, situations do occur in which the purchase price is less than the value of the net identifiable assets and therefore a credit develops. This credit is referred to as negative goodwill or, alternatively, as excess of fair value over the cost acquired, badwill, or bargain purchase. The FASB requires that this remaining excess be recognized as an extraordinary gain. The Board noted that extraordinary gain treatment is appropriate in order to highlight the fact that an excess exists and to reflect the unusual nature and infrequent occurrence of the item. Some disagree with the approach, as it results in a gain at the time of the purchase. However, it appears that the Board took a practical approach, given that this transaction rarely occurs