Jonas Tech corporation recently acquired Innovation Plus Company.The combined fi

Question

Jonas Tech corporation recently acquired Innovation Plus Company.The combined firm consists of three related businesses that will serve as reporting units. In connection with acquisition, Junas requests your help with the fallowing assets valuation and allocation issues. Support your answers with references to FASB ASC as appropriate. Jonas recognized several identifiable from its acquisition of Innovation Plus. It expresses the desire to have these intangible assets written down to zero in the acquisition period. The price Jonas paid for Innovation Plus indicates that it paid a large amount of goodwill. However, Jonas worries that any future goodwill impairment may send the wrong signal to its investors about the wisdom of the Innovation Plus acquisition. Jonas thus wishes to allocate the combined goodwill of all of its reporting units to one account called Enterprise Goodwill. In this way, Jinas hopes to minimize the possibility og goodwill impairment because a decline in goodwill in one business unit could be offset by an increase in the value of goodwill in another business unit.

Required:

1. Advise Jonas on the acceptability of its suggested immediate write off of the identifieble intangibles.

2. Indicate the relavant factors to consider in allocating the value assigned to identifieble intangibles acquired in a business combination to expense over time.

3. Advise Jonas on the acceptability of its suggested treatment of goodwill.

4. Indicate the relevant factors to consider in allocation goodwill across an enterprise's business units.

Explanation / Answer

Ans 1 An intangible asset should be amortized during its useful life.It is not advisable to immediate write off the intangible assets unless and until it becomes impaired.So jonas amortize it during its useful life not immediately.

Ans 2 The recognized intangible accounting depends on its useful life. If it has finite life than it is amortize and if it has infinite life than it is not amortize.Now the useful life of intangible assets is the expected contribution which can be directly or indireclty to the future cash flow of the company. There are other factors also like legal, effect of obsolescence,regulatory,economic factors demamd, competition,contractual etc to obtain future cash flows from the intangible asset. (para. 11 SFAS 142)

Ans 3 Jonas suggested treatment of goodwill is not appropriate. Because the increase of goodwill in one reporting unit do not offset the decrease in goodwill of other reporting unit.The goodwill which is acquired in the business combination is actually allocated across the reporting units that benefit from goodwill.

Ans 4 As per the FASB ASC;

when goodwill for impairement is tested the goodwill acquired in business combination should be assigned to one or more than one reporting units of the acquiring organization which are expected to benefit from the syngergies of combination even if other liabilities or assets of the acquired entity may not be assigned to the reporting units.Divide the total amount of goodwill among no. of reprting entities.This method of assigning goodwill to the reporting units must be supportable and reasonable. And this method should be applied to reporting units in consistent manner.

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.