Accounting Practice Associated With Goodwill Scrutinized For Costliness
Goodwill is known as the process of when a company acquires another company at a price that is higher than the value of assets the acquired company holds. For example, when Amazon bought Whole Foods, the supermarket was bought at a price that was $9 billion higher than the value of all its assets. Those assets included grocery stores and other properties.
The practice that is currently under scrutiny is the act of writing down a portion of the goodwill value each year. As it currently stands, companies are responsible for evaluating whether the goodwill value has maintained its same value. If that value has decreased, then the company must write off a portion of the goodwill value which, in turn, decreases profits.
Some say that the practice is costly and also extremely subjective. Other believe that the constant need to evaluate the value of goodwill allows for transparency to investors. There is the possibility that old practices are reinstated. Previous to the annual testing, companies simply wrote down a set portion of the goodwill each year.