Nature of Goodwill and its Accounting Treatment

This memorandum discusses the nature of goodwill and its accounting treatment in the books of accounts. It explains the different types of goodwill and their accounting treatment, including inherent goodwill and purchased goodwill. The accounting treatment for each type is discussed, with inherent goodwill not being recorded in the books of accounts and purchased goodwill being shown in the balance sheet. The conclusion emphasizes the need to record excess amount paid for goodwill and subject it to impairment testing based on fair value.

Running head: COMPANY ACCOUNTING
Company Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................4
Bibliography:..............................................................................................................................6

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Answer to question 1:
EMORANDUM
Date: 13 May 2019
To: Directors, Patagonia Ltd
From: Ms Picos, The Chief Financial Officer
Subject: Nature of goodwill and its accounting treatment
Introduction:
Goodwill is good image and name of a company, which helps a business organisation
to earn a supernormal profit in a market over the other organisations. It is the brand name and
image of the company for which the company is able to sell products and create demand for
their products in the market. Nature wise goodwill can be classified into various types and its
treatment are also different in the books of accounts. In this memorandum, various nature of
goodwill and their accounting treatment in the books of accounts have been discussed.
Nature of Goodwill:
Nature wise goodwill can be classified into two types, one is purchased goodwill and
the other is inherent goodwill. Inherent goodwill is the brand loyalty and image of the
company, which is internally developed by the company by giving premium services and
offering quality products to their customers for a long time. It follows the brand name of the
company. Purchased goodwill is the extra amount paid over the net assets of the company
while acquiring an existing business. According the characteristics of the goodwill it can be
sub classified into various groups. There are various rules and regulations for accounting
treatment of goodwill in the books of accounts. The accounting standard for noncurrent assets
and intangible asset is applicable for it.

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Accounting treatment:
Inherent goodwill are internally generated, hence it should not be recorded in the
books of accounts, as no consideration has been paid to acquire such goodwill, a complete
transaction cannot be recorded in the books of accounts as there is no purchase consideration
paid for it, but it can be shown in the footnote of the balance sheet. On the other hand,
Purchased goodwill can be shown in the balance sheet as a purchase consideration gave been
paid for it. The two side of the transaction gets completed.
Conclusion:
From the above discussion it can be concluded that, the company should record the
excess amount paid at the time of acquisition of an existing business as a goodwill in the
balance sheet. It must be subjected to impairment testing in at a specified frequency on time
and duly impaired based on the fair value.

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Answer to question 2:

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Bibliography:
Bloom, Martin. Double accounting for goodwill: A problem redefined. Routledge, 2013.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Li, Kevin K., and Richard G. Sloan. "Has goodwill accounting gone bad?." Review of
Accounting Studies 22, no. 2 (2017): 964-1003.
Wen, H., & Moehrle, S. R. (2016). Accounting for goodwill: An academic literature review
and analysis to inform the debate. Research in Accounting Regulation, 28(1), 11-21.
Yamey, B. S. "The Development of Company Accounting Conventions, by." In Evolution of
Corporate Financial Reporting (RLE Accounting), pp. 243-252. Routledge, 2014.