Jonas recognizes several identifiable intangibles from its acquisition of Innova
ID: 2425715 • Letter: J
Question
Jonas recognizes several identifiable intangibles from its acquisition of Innovation Plus. It expresses the desire to have these intangible assets written down to zero in the acquisition period.
The price Jonas paid for Innovation Plus indicates that it paid a large amount for goodwill. However, Jonas worried that any future goodwill impairment may send the wrong signal to its investors about the wisdom of the Innovation Plus acquisition. Jonas thus wishes to allocate the combined goodwill of all of its reporting units to one account called Enterprise Goodwill. In this way, Jonas hopes to minimize the possibility of goodwill impairment because a decline in goodwill in one business unit could be offset by an increase in the value of goodwill in another business unit.
**All answers need to be supported with an FASB codification.
1. Advice Jonas on the acceptability of its suggested immediate write-off of its identifiable intangibles.
2. Indicate the relevant factors to consider in allocating the value assigned to identifiable intangibles acquired in a business combination to expense over time.
3. Advise Jonas on the acceptability of its suggested treatment of goodwill.
4. Indicate the relevant factors to consider in allocating goodwill across an enterprise’s business units.
Explanation / Answer
1. Advice Jonas on the acceptability of its suggested immediate write-off of its identifiable intangibles.?
An Intangible asset should not be written down or off in the period of acquisition unless it become impair during the period
2. Indicate the relevant factors to consider in allocating the value assigned to identifiable intangibles acquired in a business combination to expense over time.?
The accounting for a recognized intangible asset is based on its useful life to reporting entity. An intangible asset with a finite useful life is amortized;An intangible asset with a indefinite useful life is not amortized; The useful lie of an intangible asset to an entity is period over which the asset is expected to contribute directly or indirectly to the future cash low of that entity. Other factors to be considered are legal, regulatory or contractual provisions, effects or obsolescence, demand, condition and other economic factor, and level of maintenance expenditures required to obtain the expected future cash flow from the asset. (para 11 SFAS 142)
The price paid by Jonas for Innovation + indicates a large amount was paid for goodwill. However, Jonas worries that any future goodwill impairment may send the wrong signal to its investors about the wisdom of Innovation + acquisition. Jonas thus wishes to allocate all goodwill to one account called "enterprise goodwill" . In this way Jonas hopes to minimize the possibility of goodwill impairment because a decline in goodwill in one business unit may be offset by an increase in the value of of goodwill in another business unit.
3. Advise Jonas on the acceptability of its suggested treatment of goodwill.?
Jonas suggested treatment of goodwill is inappropriate. To ensure that the goodwill increases in one reporting unit do not offset decrease in others, goodwill acquired in business combination is allocated across the business unit that benefit from the goodwill.
4. Indicate the relevant factors to consider in allocating goodwill across an enterprise’s business units.?
Per the B FASB ASC;
For the purpose of testing goodwill for impairment , all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date. Goodwill shall be assigned to reporting unit of the acquiring entity that are expected to benefit from synergies of the combination even though other assets and liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting unit shall be reasonable and supportable and shall be applied in a consistent manner.
Therefore, Jonas desire to minimise the possibility of goodwill impairment should not be a factor in allocating goodwill to reporting units
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