ACCOUNTING AND FINANCE

Accounting and finance



Accounting and finance

The company has included an amount for goodwill in the accounts. Describe the concept of goodwill and how it is measured.

The goodwill is the most debated topic in the field of accounting. People have believed that goodwill should not be recorded in the books of company. The concept of goodwill is used to record the value of the company which is over and above the existing market value of the company. In lay man terms it can be referred to as the premium amount which any acquirer is willing to pay over and above the market value of the assets of the company. Goodwill can be defined as excess of cost over and above the fair value of acquired net assets. Goodwill is mentioned under the heading of intangible assets in the balance sheets of the company. Goodwill is recorded when a company is acquired by another. When acquisition takes place the amount which has been paid over and above the book value of the company is known as goodwill. Goodwill is used as a blanket name in order to cover the aspects which enhances or generate the goodwill of the company (Smith, 2001, p.1). The blanket name covers the value of brand names, patents, customer base loyalty, competitive position, R&D and other hard-to-price assets a company might own. Goodwill can be found on the section of intangible assets in the balance sheet of the company because it does not have any physical presence like buildings, property plant and equipment. The purpose of recording the goodwill is to add value to the balance sheet of the company by bringing the following factors into consideration;

Strong Brand Name: A company having a strong brand name mainly due to the products it sell and its market presence will always attract a premium when it will be sold.

Strong Customer Portfolio: A company which has a set of loyal customers will be able attract premium over the book value of the company when it will be acquired because of strong business presence.

Patents or Exclusive technology: patents which are owned by the company or the technology which is exclusive to the company also adds up to goodwill. The patents are exclusive and sometimes the technology which includes exclusive machines or software which are only enjoyed by the company.

Ways to calculate goodwill

The method which has been recommended by IFRS and US GAAP is the full goodwill method. Through Full goodwill method, goodwill is calculated as a difference between the total fair value and total value of the identifiable assets. Another value is partial goodwill method which includes the difference of the fair value of the portion which is being acquired by the acquirer and the value of the identifiable assets (Wines et al, 2007, p.862).

Two measures of profitability are included in the accounts, Profit before tax and EBITA (earnings before interest and taxation, and amortisation). Discuss why Ramboll's accounts show these measures and explain the benefits of ...