James Company Acquired A Competitor In January 2011

James Company Acquired A Competitor Company In January 2011 When Jame

James Company acquired a competitor company in January 2011. When James's bookkeeper recorded the acquisition, he correctly recorded an amount for goodwill based on the expectation of the acquired company's earning a rate of return on its assets that was in excess of the industry's rate of return. In early 2013, the chief financial officer (CFO) of the James Company asked the company's bookkeeper to increase the amount recognized as goodwill as the result of increased James Company earnings. After reading the scenario, how would you define e term goodwill to a layperson and explain the bookkeeper’s treatment under current generally accepted accounting principles (GAAP) for goodwill that is acquired through an external transaction. Do you think that the CFO's request to increase the recorded amount of goodwill is appropriate? Explain the reasoning for your position. In your own words, please post a response to the Discussion Board and comment on other postings. You will be graded on the quality of your postings. For assistance with your assignment, please use your text, Web resources, and all course materials.

Paper For Above instruction

Goodwill, in the context of business acquisitions, is an intangible asset that represents the premium a company pays over the fair value of its identifiable net assets when acquiring another business. To explain this to a layperson, goodwill can be understood as the value of a company’s reputation, customer relationships, brand recognition, and other non-physical assets that contribute to its earning potential beyond its tangible assets. Essentially, it reflects the belief that the acquired company has qualities that will generate future profits, which justify paying more than the measurable value of its assets and liabilities.

Under current Generally Accepted Accounting Principles (GAAP), goodwill acquired through an external transaction is recognized as an asset in the acquirer’s balance sheet only when the purchase price exceeds the fair value of the identifiable net assets acquired. This process involves a detailed valuation of the assets and liabilities of the acquired company, and the excess purchase price is recorded as goodwill. Importantly, GAAP mandates that goodwill is not amortized but is instead tested annually for impairment—a decline in its value that warrants a reduction in its carrying amount on the books. This impairment testing compares the fair value of the reporting unit to its carrying amount, including goodwill, to determine if there has been a diminution in value.

The scenario described indicates that the bookkeeper initially recorded goodwill based on the excess earnings expectation of the acquired company, which is consistent with proper accounting practices at the time. However, the CFO’s request to increase the recorded goodwill due to increased earnings is problematic. Under GAAP, goodwill is not adjusted upward based on future earnings or management’s valuation changes; it is strictly determined at the acquisition date based on observable and measurable data. Adjusting goodwill post-acquisition to reflect increased earnings constitutes improper manipulation and could lead to financial misrepresentation. Such adjustments should trigger an impairment test rather than revaluation of goodwill upward, which is not permitted under GAAP.

Regarding whether the CFO's request is appropriate, the answer is generally no. Increasing goodwill to reflect higher earnings would be inappropriate unless it is part of a recalculation of impairment due to a decline in value, not an attempt to inflate assets artificially. GAAP emphasizes conservatism and transparency in financial reporting. Inflating goodwill without a genuine impairment could mislead investors and other stakeholders into believing the company’s intangible assets are worth more than they are, which can distort the company’s financial health and performance measures.

In conclusion, goodwill is an intangible asset that captures the value of a company's reputation and other non-physical qualities that contribute to its profitability. It is recognized following stringent valuation rules at the time of an acquisition and is subject to impairment testing but is not increased based on improved earnings post-acquisition. The CFO’s request to artificially increase goodwill is inconsistent with GAAP principles of fairness and accuracy in financial reporting, and such actions should be avoided to maintain the integrity of financial statements.

References

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