The the premise that very rarely goodwill
The new accounting treatment of goodwill significantly changed the accounting for goodwill. Goodwill is no longer amortized, but it is tested for impairment annually, or more frequently if events indicate it might be impaired. Any determined impairment loss is reported currently in the income statement. Because goodwill is not going to be amortized anymore, the reported amounts of goodwill will not decrease at the same time as under the previous regulation. The new accounting approach is based on the premise that very rarely goodwill declines in value on the straight-line basis over its useful life period.
The standard requires reporting units to conduct an annual valuation of their business. This process shall be an ideal source to determine the amount of shareholder value generated in the period for value-based management control systems. Concerning the subjectivity of the process and the variables used in the valuation process, no reliable measures can be derived from the test. Problems are related also with the fact that goodwill does not generate cashflows independent from other assets. Testing goodwill for impairment is not simple.
It requires detailed understanding of methodology for measurement assets and liabilities.The new standard will improve financial reporting transparency by reflecting accounting for goodwill more clearly, which should lead to better understanding by financial statement users of the expectations regarding the assets. The new requirements are an opportunity to provide more transparent financial information regarding goodwill write-offs and disclosures about the reasons which lead to impairment. Unfortunately, there still does not exist a generally accepted definition of goodwill as to what the “components” of goodwill are. All the definitions define that goodwill as immaterial, as it does not generate cash flows individually and it represents future benefits. Managers using the new accounting treatment make a significant number of subjective decisions when reporting accounting information to investors. The absence of market-based values is likely to increase subjectivity and uncertainty and this is presumed to reduce the usefulness of information.
Defining a cash generating unit is also an issue of subjective judgment. Instead, the new standard requires the assignment of goodwill to reporting units which shall improve financial reports, a subjective decision of defining reporting units should also be taken into consideration. Estimating fair values for assets and liabilities additionally upgrade the possibility of creative accounting. There is still the lack of an adequate approach for measuring the intangibles. We are living in an intangible economy where intangible assets play a more important. In the last decades the importance of intangibles has been rising. Unless we are able to appropriately recognize and measure intangibles (including goodwill) we will not be able to manage them efficiently.
Until now little has been written about internally generated goodwill, in spite of the fact that companies generate goodwill with their growth, development, re-establishing relationships with their suppliers and employees. We note that internally generated goodwill cannot be recognized as an asset because it does not have any set of cash flows uniquely associated with it.