Essay on Currrent Issue of Financial Accounting

1908 Words Oct 13th, 2014 8 Pages
Rachel Hartong Professor Johnson ACCT 301 Research Paper Nov. 30, 2011 The Development of Goodwill Impairment and Its Current Effects

The business world of the 20th and 21st centuries is one that has become more and more susceptible to mergers and acquisitions. As a result of the industrial revolution, and the more recent technological revolution, some firms were, and continue to be, able to gain the competitive advantage over competitors, leading to their acquisition (Hughes 16). With the increase of business acquisitions, there was a need to reexamine old accounting principles in order for the transactions to be properly recorded; this accounting is known as goodwill accounting. The concept of goodwill accounting has surprisingly been
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Another definition of goodwill as provided by Hugh Hughes states that, “goodwill may be thought of as the differential ability of one business, in comparison with another or an assumed average firm, to make a profit (Hughes 7).” These definitions are, in short, describing the presence of a synergy that a business possesses which allows it to earn more extensive profits compared to another. The need for revised accounting for acquisitions and business combinations arose in 1970 in response to an outbreak of acquisitions during the 60’s (Davis). Initially, there were two methods for this accounting known as the pooling of interest method and the purchase method. The first of these basically combined the ledgers of the two companies. The latter method required all assets to be recorded on the books at their fair values as of the acquisition date. This purchase method often inflated some of the assets because fair value was often greater than book value; this discrepancy led to inflated depreciation and amortization charges which reduced a company’s retained earnings. In 2001, Statement No. 141 was issued by the FASB, eliminating the use of the pooling method. This was only able to pass because the FASB worked to compromise with businesses on the amortization issues with goodwill; the resulting compromise came to be known as goodwill impairment (Stice 577).

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