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Long one coming up but I would greatly appreciate your help. This question may indicate a lack of understanding of this concept but can you please clarify the below.
What is the reason behind recognising goodwill?
Goodwill is the amount paid over and above an entities net assets. Considering this is an asset in the accounts, does it represent the economic benefits the subsidiary is expected to generate for the group? Due to the fact the buyer paid in excess of what the entities FS are stating – which must indicate that it there is value in the entity elsewhere.
For example, Specimen 1 ‘Abby.’
Director wants to overstate goodwill by not recognising FV adj on acquisition. I stated in my answer ‘goodwill is considered an asset and being inflated now overstates the pattern of benefits the subsidiary is expected to generate which may seem more attractive to a potential investor or lender.’
The solution is dissimilar. It talks about how the extra depreciation will not b recognised which will result in profit being overstated, keeping EPS high etc.
Would my answer get credit also?
1. Your answer would get credit.
2. Until about 1992 goodwill was not recognised AT ALL in UK accounting. We just wrote it off to reserves. So you are not alone. 🙂