Question

Critically comment on the following methods that have been used to account for goodwill

i)Writting -off the cost of goodwill directly to reserves in the year of acquisition

ii) Reporting goodwill at cost but checking it annually for impairment

Answer 1

i)Goodwill is an intagiable asset , which is recognised at the time of acquisition of any bussiness or group of assets .Goodwill is measured as excess of amount over the book value of acquired assets and this is treated as asset.Goodwill whis is recognised should be written of over the estimated usefull life through straight line method but not on the year of acquistion itsellf as the goodwill is paid in respect of the anticipiation income of future period income

ii)Goodwill need to be accounted at cost but checking annually for impairement because,wether the carrying amount is greater than the recovarable amout or not ,and its having the ability to generate cash flows or not.Impairement depnds on certain external and internal factors for ex.Damage of asset,negitive change in the technology or market or asset lying idle