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International Insight - detailed explanation for the sudden...

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International Insight iStockphoto. Softbank Corp. is Japan's biggest Internet company. It recently boosted the profit margin of its mobile-phone unit from 3.2% to 11.2% through what appeared to some as accounting tricks. What did it do? It wrote down the value of its mobile-phone-unit assets by half. This would normally result in a huge loss. But rather than take a loss, the company wrote up goodwill by the same amount. How did this move increase earnings? The assets were being depreciated over 10 years, but the company amortizes goodwill over 20 years. While the new treatment did not break any rules, the company was criticized by investors for not providing sufficient justification or a
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Unformatted text preview: detailed explanation for the sudden shift in policy. 1 Do you think that this treatment would be allowed under U.S. GAAP? Answer: The write-down of assets would have been allowed if it could be shown that the assets had declined in value (an impairment). However, the creation of goodwill to offset the write-down would not have been allowed. Goodwill can be recorded only when it results from the acquisition of a business. It cannot be recorded as the result of being created internally Source: Andrew Morse and Yukari Iwatani Kane, “Softbank's Accounting Shift Raises Eyebrows,” Wall Street Journal (August 28, 2007), p. C1....
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