# goodwill

Hi all, CFA text book (FSA book, page 67) says the excess of purchase price over the fair value of the identifiable net assets is recorded as goodwill but look the question below Under the purchase method of accounting for a merger or acquisition, if the fair market value of the tangible assets is less than the purchase price, the excess purchase price is: A) attributed to goodwill, which is depreciated over the estimated remaining life. B) proportionately allocated across all tangible assets as an adjustment to their cost basis. C) attributed to separately identifiable tangible and intangible assets, which the tangible assets are depreciated over their estimated remaining life. D) proportionately allocated across all tangible assets, which is depreciated over their estimated remaining life. Your answer: A was incorrect. The correct answer was C) attributed to separately identifiable tangible and intangible assets, which the tangible assets are depreciated over their estimated remaining life. The excess purchase price will be allocated to separately identifiable tangible and intangible assets. The tangible assets are depreciated accordingly. Any excess remaining value is attributed to goodwill which may also be created but is not amortized under either U.S. or international standards. ====================================================== So shall I consider it as goodwill or not?

Let’s say: FMV of acquiree’s assets = \$100 Book val (in books of acquiree) = \$80: if purchase price = \$100 --> identifiable assets written up to \$100 and the extra \$20 is depreciated/amortized over the useful lives of the identified assets. If price = \$110 --> same as above + the extra \$10 booked as goodwil and subject to annual impariment review, etc. The questions tells us that the price > FMV of just the TANGIBLEs, not the INtangibles. And it doesn’t mention liabs, or NET asset val. First step would be to determine FMV of ALL assets and attribute the excess to each asset. If > book val --> depreciate/amortize the excess. If there is still an excess left over, carry as goodwill. I would say A is wrong because it ignores possible values of Intangibles or liabs. So C is better.

(sorry I hit Enter to soon…) + A is also wrong because goodwill from acquisitinos is not depreciated. Annual impairment review/charge.

I think the answer is poorly worded. In the questions, they’ve stated that they have already recognized the tangible net assets and you are focusing on what to do with the excess of the purchase price over tangible assets. That excess is allocated first to identifiable intangible assets and the residual is allocated to goodwill. The identifiable intangible assets are then amortized over their usefull life. Just to complicate things, you can have identifiable intangible assets that are not considered to have a usefull life and are not amortized (a trade name). i doubt that would ever be tested on this exam though.

null & nuller, good explanations. thanks rjs157