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Theoretical and Applied Economics
No. 6 / 2006 (501)

Controversies Regarding Goodwill Evaluation, Depreciation and Recording Policies

Niculae Feleaga
Liliana Feleaga
Academia de Studii Economice Bucuresti

Abstract. In some of the continental European countries (e.g. France), there is a necessity to make a clear distinction between the legal issue of commerce fund (fonds de commerce, in French language), and the related accounting concept represented by goodwill. Fonds de commerce represents a set of movable and immovable goods with a common destination, therefore having a unique legal status. Goodwill is an intangible asset item that is placed within the Balance Sheet. It holds together all the fonds de commerce elements which finally form a subset containing the following: (i) intangible assets; (ii) not evaluated, nor separately recorded; (iii) purchased, but not internally created; (iv) which compete for the maintenance and further development of the company’s activity potential. The goodwill issue appears very often within the consolidated accounts. A commercial relationship between the parent of a group and one of its subsidiaries may appear either through the creation of a new enterprise (initiated by the group leader), or by acquisition of already existent business. In this second case, we are talking about a business combination. The acquired goodwill is mentioned in the Balance Sheet, amongst non-current intangible asset items. The internally generated goodwill is not recognised within the Balance Sheet. Goodwill may be stated as the difference between the acquisition cost and the percentage belonging to the buyer within the fair value of the assets, liabilities and contingent liabilities identifiable acquired. In the advanced accounting systems, goodwill is no longer amortized. His useful life is undefined, but not unlimited. The fact that is no longer amortized determines an annual depreciation test. Such a depreciation test is meant to evaluate the goodwill on the basis of present cash flows.

Keywords: internally generated goodwill; purchase method; intangible assets with indefinite useful lives; goodwill should be tested for impairment; recoverable amount.

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