Professional Documents
Culture Documents
Goodwill
Goodwill is an intangible asset that arises at the time of business acquisition when the price
paid for the business exceeds the fair value of the net identifiable assets.
In most cases a business is worth more than the replacement cost of its net identifiable assets
and that is why the acquiring company pays more than the fair value of the acquired company's
net identifiable assets. At the time of acquisition, the fair value of the acquired company's assets
and liabilities are added to the fair value of acquiring company's assets and liabilities. The
excess of price over the fair value of net identifiable assets (assets minus liabilities) is recorded
as a separate asset called goodwill.
It is an asset because it represents the economic value which is not captured by other assets for
example the reputation of the business, the value of its human capital, its future growth
potential, its professional management, value of a companys brand name, solid customer base,
and any patents or proprietary technology represent goodwill.
Revaluation Surplus
Upward revaluation is not considered a normal gain and is not recorded in income statement
rather it is directly credited to an equity account called revaluation surplus. Revaluation
surplus holds all the upward revaluations of a company's assets until those assets are disposed
of.
Reversal of Revaluation
If a revalued asset is subsequently valued down due to impairment, the loss is first written off
against any balance available in the revaluation surplus and if the loss exceeds the revaluation
surplus balance of the same asset the difference is charged to income statement as impairment
loss.
3. Impairment of Asset
Definition: Impairment is a permanent decline in the value of an asset. This situation exists
when the cash flows or other benefits generated by an asset decline, as determined through a
periodic assessment. If there is impairment, then the difference between the fair value of the
asset and its carrying amount is written off.
Depending on the situation, an impairment can cause a major decline in the book value of a
business.
Goodwill Impairment
Goodwill that has become or is considered to be of lower value than at the time or purchase.
From an accounting perspective, when the carrying value of the goodwill exceeds the fair
value, then it is considered to be impaired. Negative publicity about a firm can create goodwill
impairment, as can the reduction of brand-name recognition.
4. Minority Interest
Also referred as Non-controlling interest in business, minority interest is an accounting
concept that deals with the part of a subsidiary corporations stock which is not owned by the
parent corporation. Moreover, the enormity of the minority interest in the subsidiary company
is usually less than 50% of outstanding shares, or the corporation would normally stop being a
subsidiary of the parent corporation.
To define in a more elaborate manner, minority interest can be explained as a significant but
non-controlling ownership of less than 50% of the voting shares of a company by an investor
or another company. Also, it can be referred as a non-current obligation which can be found on
the balance sheet of the parent company which represents the amount of subsidiaries owned by
minority shareholders.
5. Deferred taxes
Deferred taxes can show up either as assets or liabilities.
A deferred tax asset reflects a company's belief that it has paid too much in taxes over prior
periods and can thus expect to get tax relief in future periods. A deferred tax liability is a
measure of the opposite - a company that has been able to use the tax code to good effect and
paid less in taxes (legally) than it should have (assuming the statutory tax code were applied to
taxable income) can reasonably expect to pay higher taxes in future periods and has to show
this as a liability. While the logic for both items is impeccable, it is worth noting that they
reflect expectations of future tax savings (in the case of deferred tax assets) and tax liabilities
(in the case of deferred tax liabilities). There is no contractual obligation or time line for these
expected cash flows and that can create problems in valuation.
(i). Deferred tax assets are created due to taxes paid or carried forward but not yet recognized
in the income statement. Its value is calculated by taking into account financial reporting
standards for book income and the jurisdictional tax authority's rules for taxable income. For
example, deferred tax assets can be created due to the tax authority recognizing revenue or
expenses at different times than that of an accounting standard. This asset helps in reducing the
companys future tax liability.
(ii). A deferred tax liability occurs when taxable income is smaller than the income reported
on the income statements. This is a result of the accounting difference of certain income and
expense accounts. This is only a temporary difference. The most common reason behind
deferred tax liability is the use of different depreciation methods for financial reporting and the
IRS.
6. Stock vs Shares
Stock: Businesses may be organized in a number of different ways, including sole
proprietorships, partnerships or corporations. A business may offer to sell a portion of its
ownership by issuing stock. The most common form of stock is called -- oddly enough -common stock. Common stock ownership allows you to participate in both the profits and
losses of the company, and gives you the right to vote at the company's annual stockholders'
meeting.
Shares: A company's stock is divided into shares. Each share represents an equal amount of
ownership in the company and is entitled to a participation in the company's profits and losses
that is equal to every other share. If the company's board of directors declares a dividend, each
share will receive the same amount.
7. Securities
A security is a financial instrument that represents an ownership position in a publicly-traded
corporation (stock), a creditor relationship with governmental body or a corporation (bond), or
rights to ownership as represented by an option. A security is a fungible, negotiable financial
instrument that represents some type of financial value. The company or entity that issues the
security is known as the issuer.