Doug Heath

Final Draft

Independent CPA Services

2277 Martha Berry HWY
Mt. Berry, Georgia 30149
October 20, 2015
Mr. James J. Jonas
Jonas Tech Corporation
123 Luckie Street
Atlanta, Georgia 30306

Dear Mr. Jonas:

Enclosed is the report about the acquisition of Innovation Plus Company that you requested. The
report, titled Business Acquisition: Allocation of Goodwill and Intangibles, examines the nature
of intangible write-offs, treatment of goodwill, and issues in allocating both goodwill and values
of intangible assets.
The report shows that intangibles should not be written off in the period of acquisition unless an
impairment occurs. Instead, these assets should be allocated over the useful life of the asset
because this is the time that the asset is expected to contribute to the companys cash flows. The
report elaborates on how to assess goodwill and why each reporting unit must receive part of the
goodwill account total.
If there are any questions, please feel free to contact me. I will be glad to further explain
anything that you may need.
Sincerely,

Business Acquisition: Allocation of Goodwill and Intangibles

Prepared for Jonas Tech Corporation
October 20, 2015

CONTENTS
EXECUTIVE SUMMARY.ii
INTRODUCTION... 1
WRITING OFF INTANGIBLES.....1
FACTORS IN ALLOCATING THE VALUE OF INTANGIBLES...2
TREATMENT OF GOODWILL.2
FACTORS IN ALLOCATING THE VALUE OF GOODWILL3
CONCLUSION3
WORKS CITED..4

EXECUTIVE SUMMARY
This report provides information about allocating goodwill and intangibles for the manager of
Jonas Tech Corporation. Included is information about the nature of intangible write-offs,
treatment of goodwill, and issues in allocating goodwill and values of intangible assets.
Allocation refers to the process of identifying and assigning a value to an account or asset. In
consolidations, a company must recognize the value of an intangible asset so that it may record
its worth on the financial statements. Intangibles can include trademarks, patents, and copyrights.
Intangibles are often overvalued or undervalued companies must acknowledge the differences
between the values listed on the books and the actual values of the assets.
Writing-off an intangible in the current period is not accepted under Generally Accepted
Accounting Principles (GAAP); the asset must be amortized over its useful life. The amortization
must occur because the asset is contributing to cash flows and must be reported for the time that
it contributes. The only time assets can be written down in a current period is if an impairment
occurs. There are factors that can determine the values at which to allocate these assets. Some of
which include:

The useful life of an asset.

Legal provisions.
Regulatory and contractual provisions.

Goodwill should be distributed to reporting units that will benefit from receiving the allocation.
GAAP does not allow for the entire amount of goodwill to be placed into one account. Instead, it
must be spread out between a companys business units. Investors can then see each report and
gather information about the financial standing of a company.

Business Acquisition:
Allocation of Goodwill and Intangibles
Introduction
The purpose of this report is to provide information regarding consolidation for Mr. James J.
Jonas, the manager of Jonas Tech Corporation. It discusses how to report goodwill and
intangibles in business acquisitions.
This report covers four major topics:

The write off of intangibles.

Factors in allocating the value of intangibles to expense over time.
The treatment of goodwill.
Factors in allocating goodwill across business units.
Writing off Intangibles

Acquiring a new business is an exciting, scary time for parent companies. It shows growth and
stability, but often times doubt becomes a genuine factor. This is normal and this report will
guide Jonas Tech through proper techniques of handling this new feature. In a business
acquisition, there are two companies; one company is purchasing and the other is being
purchased. These are called parent and subsidiary, respectively. Sometimes when purchasing
another company, the value of some assets on the subsidiarys books are misrepresented. The
parent must recognize these incorrect values on its statements by correctly allocating the true
values. If incorrect, the assets will either be overvalued or undervalued, both of which need to be
reported.

Jonas Tech suggested that the identifiable intangibles from its acquisition of Innovation Plus be
written down to zero in the acquisition period. Unfortunately, GAAP does not allow this type of
action because it misrepresents the value of the company to investors. Jonas must report the
value of the assets over their useful life as long as the assets are contributing to cash flows, and
the amortization at which Jonas records them is done so via the straight-line method.1 GAAP
requires companies to include these amortizations so investors can review their financial status in
a fair manner. The goal of the financial reports is to give investors an honest representation of
business affairs and to predict of how the company will do in the coming periods. It would be
unjust to essentially trick investors by not acknowledging the true value of the purchased assets
and writing off their value in the acquisition period. The only time an asset can be written down
in an acquisition period is if it becomes impaired in the current period.2
Factors in Allocating the Value of Intangibles
Upon the business acquisition, Jonas must account for the value of the intangible assets obtained.
Accounting for the value occurs over the assets useful life. Any time frame that Jonas plans to
use said assets to contribute to its cash flows is considered the useful life.3 Once the asset is no
longer useful, it is thought of as no longer having any value. There are two types of intangible
assets, one that has a finite useful life and one that has an indefinite useful life. An asset with a
finite useful life is one that has a definite time period of usefulness. GAAP requires businesses to
recognize the amortization of finite assets in each period that the asset is in use so that investors
1 ASC 350-30-35-6, https://asc.fasb.org/section&trid=2144487 (2013).
2 ASC 350-30-35-7, https://asc.fasb.org/section&trid=2144487 (2013).
3 ASC 350-30-35-1, https://asc.fasb.org/section&trid=2144487 (2013). ASC 350-30-35-2,
https://asc.fasb.org/section&trid=2144487 (2013).

can gather information that represents genuine business operations. Indefinite-life assets are not
to be amortized because there is no definite amount of time that these assets are useful to a
company. Companies are required to periodically evaluate the asset to determine if its useful life
has become apparent. The useful life is a primary factor in allocating the value of the intangible
because it will determine the amount to record each period. Determining the useful life may be a
difficult task. For this reason, the accounting standards have given businesses the relief of
estimating the useful life to the best of their ability.4
Additionally, there are legal factors that can affect the useful life of an asset which include: legal,
regulatory, and contractual rights. It is out of a companys control if an asset becomes subject to
these provisions, but if the values change they must be accounted for on the books.5
Treatment of Goodwill
Jonas has expressed its desires to gather all associated goodwill acquired in the purchase and
combine it together in one account called Enterprise Goodwill even though there is no such
account. By grouping the goodwill of each reporting unit into one account, investors are unable
to see current business operations to the fullest extent. Therefore, it is dishonest to convey this
information on the financial reports. Goodwill is attributed to the reporting units, or business
operations, that will benefit from the synergies of the combination.6 It is here, in the associated
reporting unit, that the goodwill is tested for impairment to determine if its value is being

4 ASC 350-30-35-6, https://asc.fasb.org/section&trid=2144487 (2013).

5 ASC 350-30-35-3, https://asc.fasb.org/section&trid=2144487 (2013).
6 ASC 350-20-35-41,
https://asc.fasb.org/section&trid=2144453&search_marker=searchresult&query=Z2
9vZHdpbGwrc3luZXJnaWVz%26para=66047195 (2013).
7

represented accurately. The allocation to each unit is required by GAAP and must be done
despite the negative signals that may be sent to the investors.
Factors in Allocating the Value of Goodwill
There are many factors that need to be considered before placing the amount of goodwill into a
business operation. The biggest factor may be the fact that goodwill is spread across a businesss
reporting units. As stated above, the amount assigned to goodwill is allocated to specific
reporting units that will benefit from the attribution, but how much a reporting unit will benefit
could be subjective. Determining the values that are assigned to each unit is a task that may lead
to more difficulties than expected. If a reporting unit receives an incorrect allocation of goodwill
then there are sure to be impairments in the future (Impairments are discussed later in this
section). It will depend on the needs of the company as to which values are placed into each unit.
Additionally, goodwill is assigned to reporting units at acquisition to test for an impairment loss.
It would be nearly impossible to test for an impairment of goodwill if its value is kept as a single
account. By allocating the values to a particular entity, management can test for goodwill
impairment in each reporting unit and determine wherein a problem lies, if one arises. Having
the goodwill account spread across business units allows management to see exactly where the
company is struggling so that adjustments can be made.
There is no need to worry about which account to place goodwill in regards to a potential
impairment loss. As mentioned before, goodwill is distributed to the reporting unit that will
receive benefits because this is the standard that GAAP has created.7 Fortunately for Jonas, it is
7 ASC 350-20-35-41,
https://asc.fasb.org/section&trid=2144453&search_marker=searchresult&query=Z2
9vZHdpbGwrc3luZXJnaWVz%26para=66047195 (2013).
8

irrelevant whether the account that holds goodwill is referred to as Enterprise Goodwill or if it is
distributed to the reporting units, because impairment testing will be done either way. Trying to
hide goodwill from investors is deceiving and dishonest. Jonas said by pooling the amount into
one account the impairment of goodwill could be hidden as a decrease in one business unit
would be offset by an increase in another business unit. Jonas statement is true but not
acceptable. Even though the goodwill account may have offset the decrease with an increase, the
investors must be able to see exactly where a decrease occurs so that they can draw their own
conclusion as to the wisdom of an investment in Jonas Tech. All of that said, honest reporting is
the primary goal for accounting. The worry that a wrong signal will be sent to an investor cannot
allow management to alter its policies altogether.

Conclusion
Writing off intangible assets must be done in a way that fairly represents the businesss
operations. If Jonas is using an intangible asset and said asset is contributing to the cash flows of
the company, then it must be amortized over its useful life. They must be written down over its
life instead of all at once in the acquisition period. The amortization shows investors which
assets are directly and indirectly contributing to the financial situation of the company. In
addition, goodwill cannot be attributed to one account. It must be given to the reporting units that
will benefit from the synergies of combination. Goodwill is then evaluated and tested at each
reporting unit for impairment.
WORKS CITED

Financial Accounting Standards Board (FASB), 2013. Accounting Standards Codification.

Stamford, Conn.: FASB

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