Introduction
The accounting for valuation and impairment of goodwill has received important recognition in popular areas. However, due to the economic crisis in the United States and the ongoing steps towards the convergence with the IFRS, a focus on the potential valuation of goodwill has become to the forefront. This project will examine the accounting issues of valuation of goodwill for the major areas of concern for the corporate financial position such as economic, social, and legal or political issues under each accounting body (FASB and IASB).
Government patronage/ support
The products of a company will experience high demand especially when it is supported by the government. Consequently, the value of the goodwill will increase. Under IASB, goodwill normally arises as from a combination of business, and the value of the goodwill is that figure paid more than the value the company acquired. Therefore, any goodwill that is related to the grouping should be allocated to the units that generates cash because of the proceeds that is expected from the combination. Consequently, the goodwill for every unit that had been allocated will be tested for revaluation every year by comparing the units for the carrying value with the units for the recoverable amount.
Recoverable value
According to the IASB, When the units for the recoverable amount is greater than that of the carrying amount, revaluation of the goodwill allocated to that unit should not take place. However, if the unit for the carrying figure is greater than the recoverable figure, the company must make a recognition to the loss by revaluing the goodwill (IASB, 2011).
Social factor affecting goodwill valuation under IASB
Good relation with the suppliers
As far as goodwill is considered, companies that have access to reliable suppliers of raw materials will experience more added advantage as compared to other companies without reliable suppliers. Due to varying social aspects such as environment, and culture of the company, goodwill may be accounted for in a different way under IASB (Walk, Dodd & Rozycki, 2008). Therefore, the reporting standard (IASB) produce efficiency and consistency across several companies. However, when making decisions on practices that will benefit most firms all over the world, many issues begin to arise with the diversity of companies that will be needed to adhere to these standards.
Economic issue affecting goodwill valuation under IASB
Nature of the business and quality of the products
A company that is always engaged in constant production have the highest chance of earning profit as well as goodwill. A company that is known for quality products and services will easily have a good reputation and fame in the market. Therefore, the value of the goodwill of such firms will increase.
According to IAS 36, the disclosure of valuation or impairment have to include, but not limited to loss in valuation recognized in profit or loss, impairment losses on revalued goodwill must be recognized in other comprehensive income, and the impairment losses on revalued goodwill should be reversed in other comprehensive income.
Legal aspects affecting goodwill valuation under FASB
Patent right
A company that possesses a patent right to produce goods and services will always earn more goodwill than others. According to FASB, the valuation and impairment of goodwill should be a similar concept as it was for long-term assets because it exist when the carrying figure of goodwill is more than its implied fair value.
Financial distortion
The legislative point of the FASB concerning the valuation of goodwill could distort the financial information because it is hard to estimate the periods and patterns in which the economy benefits from the consumption of goodwill (Hamilton, Hyland & Dodd, 2011). Moreover, valuation of the assets relates to the accounting concepts of historical cost and fair value. Therefore, if the intention is to hold an asset (goodwill) for a long time, then the cost of the asset should be allocated over the time through depreciation. That is depreciation will tie in with the matching concept where the cost of goodwill will be matched with the financial benefits. Additionally, the adjusted book value of the goodwill at any period may not reflect the present fair value of the asset (goodwill). Therefore, if the fair value is more than the carrying value, then valuation has taken place.
Social factor that influence goodwill valuation under FASB
Good customer base and management
Any company that is having a good customer base that is also likely to come back for the goods and services because of the provision of high quality products and services by the company will have higher goodwill as compared to similar companies in the same sector (Henriques, 2010). If the management team is capable of delivering the services to the customers, there will be a good reflection on the operations of the company. In return, this will boost the proceeds and goodwill of the company However, numerous assumptions and estimations that were used in verifying the recoverable amount may bring up doubt regarding the reliability of the valuation test of goodwill and financial information. Additionally, because of difficulties in verifying the fair value and estimates of goodwill, there is a possibility that the management team may apply this discretion to hinder or delay the valuation of goodwill.
Economic factors affecting valuation of goodwill under FASB
Capital
Concerning capital, if the company has more capital in the business, there will be more chance of goodwill. Similarly, a company that is having higher debt will be forced to pay more interest from its profits. Consequently, the value of the goodwill will be less.
Recession
Since goodwill is made up of many components, the valuation test is conducted as a whole without making a consideration to various components and natures of goodwill. Therefore, valuation of goodwill may not lead to economic substance. The impairment of goodwill is always influenced by economic fluctuations. Therefore, the risk of valuing the goodwill may be underestimated at the time of economic expansion. On the other hand, it can also be overestimated during the economic recession.
Economic volatility
It is apprehended that valuation of goodwill will expand the volatility of the earnings in sympathy with the economic cycle. If the book value of reporting unit goodwill is more than the implied fair value of that goodwill, the valuation loss will be recognized in an amount that is equal to that excess. The subsequent recognition of the loss cannot exceed the carrying amount of goodwill. After goodwill revaluation loss has been recognized, the adjustment on the carrying value of goodwill will be its new basis of accounting. However, FASB does not allow the subsequent reversal of previously recognized goodwill valuation.
Conclusion
Both FASB and IASB have accepted the accounting standards for valuation and impairment specifically on goodwill and long-term assets. However, FASB and IASB may have similar features, but some major discrepancies do exist in valuation accounting for goodwill between the two bodies (FASB and IASB). The main differences between revaluation impairments of the goodwill and the reasons behind the discrepancy levels range from differences in reporting of specific entries. Therefore, the main difference in reporting valuation and impairment of goodwill is due to the method of determining the value and calculation, goodwill allocation, and the reversal of goodwill. Therefore, the new standards that take good practices for both standards under FASB and IASB should be incorporated into one universal standard to fulfill the need for most companies.
References
Hamilton, K., Hyland, B., & Dodd, J. (2011). Valuation and Impairment. IASB & FASB Comparison.
Henriques, A. (2010). Corporate Impact: Measuring and Managing Your Social Footprint. Routledge.
Walk, H., Dodd, J., & Rozycki, J. (2008). Accounting Theory. Conceptual Issues in a Political and Economic Environment (7th ed.). Thousands Oak: Sage Publications Inc.
