Accounting goodwill

C

CFAMontreal

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
If we account goodwill as intangible asset in ASSETS column, which "LIABILITIES&SE" or "ASSETS" item in Balance Sheet offset the addition of Goodwill? Cash balance minus? or what? And when we impair/write-off goodwill eventually as the result of impairment review, which other items in Balance Sheet offset this event?

Would be grateful for any response!
 
hmmmm,
i read only that impairment change is recorded on the income statement.
I dont think that helps you..
 
Do I understand correctly that impairment charge is deducted from Goodwill and Retained Earnings items so that they are balanced in Balance Sheet

In the second case with Retained Earnings: Impairment charge will be deducted in Income Statement as "other income/expenses", it will come net of tax to NI and NI net of dividens - then to Retained Earnings, where is Impairment charge*tax rate - in cash deductions?

I am struggling with all of these concepts...which I want to understand, indeed.
 
It's kind of hard to explain, especially for a slow 2 fingered typist like myself.

First, goodwill only comes into existance when a company is purchased. You can't just throw it on your balance sheet.

Say I have company with a $100 desk (book and FMV) I bought with $100 of equity. And I have a great idea and lots of people lined up to buy that idea. You decide to buy 100% of my company for $5000. That extra $4900 that you are willing to pay is what gives rise to goodwill. At the end of the day, you are taking cash and buying a present value of some excess returns that you expect to be able to generate from my company vs what you could expect to earn from the exact same underlying acquired balance sheet of another similar company (Note: This is meant as a layman's explanation of what goodwill is, not a technical definition)

On your (preconsolidation) balance sheet you now have a line item:

Investment in SuperIco $5000

The inital offset to the investment entry that you recorded may have been any combination of cash, debt, equity, etc. It's whatever was used to fund the acquisition (irrespective of whether or not the transaction gave rise to goodwill.)


In order to consolidate my operations onto your balance sheet you will record the following entry

PPE 100 (to consolidate the desk)
Goodwill 4900 (to reflect the goodwill you bought)
Investment in SuperIco 5000 (to eliminate the investment)


The elimination entry records all specifically identifiable assets and liabilties acquired at their fair market value at date of acquisition, with any excess amount paid typically attributed to Goodwill.

In terms of impairment, its easiest to start with the pre-2001 rules. Back then you treated goodwill pretty much like a depreciable asset, writing it down in equal pieces over 40 years thru your income statement. Now Goodwill is no longer amortized annually. Instead you test to see if the amount has been impaired, and only then do you adjust the amount downward. Impairment also flows thru the income statement, except that the amount is not a scheduled, even, annual amount. Instead it's an unpredictable "chunky" amount that you record as an expense on an as needed basis when there is evidence that the value has declined.


Hope this helps.
 
Hi CFAMotreal,

Good Question. I don't think I have got the answer but I work it out like this.

Asset (A) = Liabilites (L) + Owners Equity (OE)

Assume you have just started a company with a OE of $1000. You will use it to purchase machines worth $500. Therefore would you decrease OE by 500? ....No . You will not, because that is used to purchase an asset which will be recorded at 500. Therefore the balance sheet will be

Asset
Machines 500
Cash balance 500

Liabilities
0

OE
1000

Assume and Machine has a life of 5 years and Salvage value of 0 and SL Depreciation. Therefore, depreciation for all years is 100. Assuming you net profit it 0 for the first year and there are no liabilites.

The First Year balance sheet will be.

Asset
Machines 400
Cash 600 ------- cash increases by 100 because you have taken depreciation of 100 and depreciation is non-cash deduction from income.

Liabilities
0

OE
1000


Similarly, with Goodwill. Goodwill will be purchased through OE. it does not decrease OE, it utilised to puchase an asset. Therefore, it still remains as OE unchanged except for decrease in cash. As in the case of the machines. When the goodwill has been impaired. It will be reduced from Income just as depreciation, as a non-cash deduction to reduce the value of the goodwill....but increase cash.

Someone, please tell me I am correct with this.
 
Goodwill is an intangible Asset, which, upon buying a company for MORE than it is worth increases the goodwill asset. I.e. imagine a company that is worth $100 on the BS of that company. When that company is bought for $120, Cash is credited for $120 and Goodwill is debited for $20. Based upon the consolidation method of accounting the remaining BS's for the companies are emalgomated, assuming >50% ownership by the purchasing firm, plus a liability for minority shareholder ownership.

When an asset is impaired, the asset is credited and the shareholder's equity (RE) is debited as there is an expense (on the IS) incurred in the year of impairment.
 
Salil Wrote:
-------------------------------------------------------
> Hi CFAMotreal,
>
> Good Question. I don't think I have got the answer
> but I work it out like this.
>
> Asset (A) = Liabilites (L) + Owners Equity (OE)
>
> Assume you have just started a company with a OE
> of $1000. You will use it to purchase machines
> worth $500. Therefore would you decrease OE by
> 500? ....No . You will not, because that is used
> to purchase an asset which will be recorded at
> 500. Therefore the balance sheet will be
>
> Asset
> Machines 500
> Cash balance 500
>
> Liabilities
> 0
>
> OE
> 1000
>


*********OKAY.. STOP HERE********

EVERYONE IGNORE EVERYTHING THAT WAS WRITTEN AFTER THIS POINT. IT IS WRONG AND MAKES NO SENSE.

Everything you wrote after this is so wrong and so far off track that all I will say is spend some serious time with an accounting text, it is not worth my effort to try and correct/restate what was written. Your fundamental understanding of cash flows related to taxes and deductions is way to naive. Read, then come back with questions about any SPECIFIC problems/examples that you don't understand.
 
jamespucyk Wrote:
-------------------------------------------------------
> Goodwill is an intangible Asset, which, upon
> buying a company for MORE than it is worth
> increases the goodwill asset. I.e. imagine a
> company that is worth $100 on the BS of that
> company. When that company is bought for $120,
> Cash is credited for $120 and Goodwill is debited
> for $20. Based upon the consolidation method of
> accounting the remaining BS's for the companies
> are emalgomated, assuming >50% ownership by the
> purchasing firm, plus a liability for minority
> shareholder ownership.
>
> When an asset is impaired, the asset is credited
> and the shareholder's equity (RE) is debited as
> there is an expense (on the IS) incurred in the
> year of impairment.


More or less accurate. I would only note that in quantifying goodwill you don't look at book value. You wrote " I.e. imagine a company that is worth $100 on the BS of that company. "

While the carrying value may be $100 it is quite possible that some of the tangible assets (PPE, Inventory) and intangibles (ex. patents) may be carried at historical costs which are far below current FMV. First you adjust those values, only then if the purchase price exceeds FMV of identifiable (A-L) would you record goodwill (factoring in misc adj like minority interest. etc.)
 
Guys, thank you so much....Super I, I will read this week everything about cash flows, taxes and goodwill and will come up with some more intelligent questions. Have a nice day ;)
 
You must log in or register to reply here.
Back
Top