ACC563 Assignment 4 - Week 8: Assignment #4 Week 8:...

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Week 8: Assignment #4 1 Week 8: Assignment #4 ─ Best Practices Strayer University Acc 563 – Advanced Accounting Theory Professor: Alfred Greenfield February 25, 2011 Week 8: Assignment #4 ─ Best Practices
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Week 8: Assignment #4 2 Explain Which Long-Term Asset Is the Most Difficult to Address from an Accounting Perspective and Why Goodwill is the most difficult to address from an accounting perspective. It is undoubtedly one of the most complex and controversial assets presented in financial statement. The reasons why goodwill is the most difficult to address from an accounting perspective are summarized as follows. 1. Goodwill cannot be individually identified. It is often referred to as the most intangible of all intangible assets. Goodwill is unique because unlike receivables, inventories, and patents that can be sold or exchanged individually in the marketplace. Goodwill can be identified only with the business as a whole. It arises from how the physical assets and human resources of the entity have been employed within the business environment. Specific factors for the existence of goodwill in an entity might include good reputation, customer loyalty, market penetration, effective advertising, an excellent distribution network, good industrial relations, superior product design, an outstanding workforce and superior management 2. The value of goodwill is difficult to be objectively calculated. The value of goodwill is calculated on the basis of forecasts which are inherently unreliable and subject to manipulation. Theoretically, the value of goodwill is equal to the discounting present value of expected superior earnings (Schroeder, Clark, & Cathey, 2011). The expected superior earnings is calculated by subtracting the normal earnings in the industry from the expected future earnings. As a result, the process of estimating the value of goodwill includes forecasting future earnings and choosing an appropriate discount rate. Forecasting future earning is a risky proposition. Generally, the past often provides useful
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Week 8: Assignment #4 3 information concerning the company’s future earnings potential. Determination of the discount rate to be used in making goodwill calculations is a fairly subjective estimate. The lower the discount rate, the higher the value of the goodwill and vice versa. 3. Testing for goodwill impairment is difficult. Impairment is defined as the condition that exists when the carrying value of an asset exceeds its fair value. Because goodwill cannot be sold by itself and does not produce its own cash flows, determining the fair value of goodwill for impairment purposes created a challenge. That is, the fair value of goodwill is difficult to measure since there is never an active market for such an intangible asset. In addition, the statement of SFAS No.142 is silent on several issues relevant to its
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ACC563 Assignment 4 - Week 8: Assignment #4 Week 8:...

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