Debate on Goodwill

This management case study explores the debate on goodwill, an intangible resource in company acquisitions. It discusses the accounting implications, including the concept of capital maintenance theory. The study also highlights the challenges and risks associated with recording goodwill. References to relevant literature are provided.

Running Head: Debate on Goodwill 1
Management case study
Debate on Goodwill

Debate on Goodwill 2
Goodwill stands to be an intangible resource concerning the acquisition of a company by another
one recording its worth if the acquisition price exceeds the fair amount of the organization.
Goodwill is generally considered as a tribute to brand value and business potentiality of the
company in the marketplace (Brown, Beekes, & Verhoeven, 2011). It is derived using the
following formula –
Goodwill = Acquiring cost of the target company – Fair worth of its resources and obligations
The accounting implication of GAAP and IFRS happens to record as soon as the asset or
company gets purchased and need to be recorded in the financial statement of the acquirer
(Arens, Elder, & Beasley, 2013).
But there seems to be certain disputes while considering the aspects of goodwill as certain
sections of accountant are not in favor of recording the goodwill during its acquisition. This is
because while acquiring the resource, it would not be possible to estimate the future cash flows
(Collings, 2014). Again this sort of events becomes prevalent while comparing the financial
credentials with other companies especially if those companies make any kind of acquisition.
This aspect of goodwill could be further elaborated by stating the concept of capital maintenance
theory implying the fact that the profitability is due to be realized unless the business strives to
maintain the worth of net assets during its accounting era. So capital maintenance theory stands
for testing the assets for the purpose of generating revenue rather than recording the same as it is
acquired by the company (Eilifsen, Messier, Glover, & Prawitt, 2013). The concept of capital
maintenance has strong implications in terms of inflation as inflation has the scope to enhance
the worth of the assets. This is despite the fact that the underlying worth of the resources does
not undergo any sort of changes (DeFond & Zhang, 2014). Therefore the capital maintenance
theory seems to be very practical in its approach as it tends to have an appropriate mechanism to
modify the worth of the net assets considering the aspect of inflation.
On this note it could be stated that recording of goodwill at its initial stage is filled with
estimations that could be harmful for the organization in the upcoming future. It could be stated
on the matter that goodwill is quite difficult to be priced and a sudden impairment of goodwill
could affect reputation of the organization (Brown, Beekes, & Verhoeven, 2011). The significant
aspect of goodwill lies in its subjective value but it apparently runs the risk of over-valuation in

Debate on Goodwill 3
the process. In this context the relevance of the capital maintenance theory stands tall as it
delivers sufficient time for the resources to perform within the specified accounting period
though it stands to be a rare phenomenon in the business world. Capital maintenance is quite
practical in the contemporary times as it record the net changes in assets for the period against
the goodwill which gets recorded as and when the latter gets generated without being tested.

Debate on Goodwill 4
References
Arens, A., Elder, R., & Beasley, M. (2013). Auditing and assurance services. Boston: Pearson
Higher Ed.
Brown, P., Beekes, W., & Verhoeven, P. (2011). Corporate governance, accounting and finance:
A review. Accounting & finance, 51(1), 96-172.
Collings, S. (2014). Frequently Asked Questions in International Standards on Auditing
(ProQuest Ebook Central ed.). Somerset: Wiley.
DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting
and Economics, 58(2-3), 275-326.
Eilifsen, A., Messier, W., Glover, S., & Prawitt, D. (2013). Auditing and assurance services.
London: McGraw-Hill.