Chapter 9: CAPITAL ASSETS CHAPTER 9

GOODWILL Goodwill is the value of all the favourable attributes that relate to a company. Goodwill includes exceptional management, a desirable location, good customer relations, skilled employees, high quality products etc. Unlike equipment account, which can be sold individually, goodwill can not be sold individually. Only when the entire business is sold, goodwill will be sold as well. Goodwill equals the excess of cost over the fair market value of the net assets acquired. In other words, Goodwill = Selling price (of business) – OE

GOODWILL Putting a number of goodwill account is very subjective, so normally, goodwill is recorded only when there is a purchase of an entire business. Only at this point, it is possible to do an independent valuation. Goodwill is not written off as it has an unlimited useful life. It must be tested regularly for impairment. Because of its nature, goodwill account requires a write-down (due to impairment loss) more often than any other type of intangible asset.

GOODWILL Example question which can potentially show up on the final exam. Buyer pays $1Million dollar on May,2014. Mr. Park’s accounting firm has the following assests: Total Assets = 500,000 Total Liability = 300,000 OE =? Goodwill =? Solution: OE = 500,000 – 300,000 = 200,000 Goodwill = 1 million – 200,000 = 800,000

CKSS Balance Sheet December 31, 2013 Assets Rental equipment (note 4)$90,348 Property, plant and equipment (note5) 68,959 Intangible assets 7,355 Goodwill121,378 *Note: The Goodwill value is derived from the selling price – OE, when the owner purchased this business from seller. FINANCIAL STATEMENT PRESENTATION of Intangible Assets

In the balance sheet, property, plant and equipment, natural resources are often combined and reported in the balance sheet as “Property, Plant and Equipment” or “capital assets” or “fixed assets”. Intangible assets are normally listed separately, after PPE. Goodwill must be disclosed separately from the intangible assets. There should be disclosure of the balances in the major classes of assets and accumulated amortization of major classes of assets or of assets in total. FINANCIAL STATEMENT PRESENTATION

The amortization methods used should be described and the amount of amortization expense for the period disclosed in disclosure note. Their impairment policy must also be disclosed in the notes to the financial statements. Impairment losses should be shown on a separate line on the income statement. Note 4: discloses the cost, accumulated amortization and net book value of the rental equipment. Note 5: discloses the cost, accumulated amortization and net book value of the company’s property, pant and equipment. FINANCIAL STATEMENT PRESENTATION

ASSET TURNOVER RATIO The following two ratios assess the profitability of total assets. Asset turnover ratio shows how efficiently a company uses its assets to generate sales. This ratio shows how much dollars of sales are generated by each dollar which is invested in assets. When we compare two companies in the same industry, the one with the higher asset turnover is operating more efficiently. = the higher the better Net Average Assets Sales Total Assets Turnover  =

Samsung vs Apple: If Samsung’s Average Total Asset and Apple’s ATA are the same number, (100 M) but Samsung’s net sales is 10 M whereas Apple’s net sales is 8 M. Which company has a higher asset turnover? Which company is operating more efficiently? If Dell’s net sales and HP’s net sales are 5M. Dell’s Average Total Asset is $20M whereas HP’s ATA is $50M. Then Which company is operating more efficiently? Asset Turnover Ratio

RETURN ON ASSETS The return on assets ratio measures overall profitability. This ratio indicates the amount of earnings which is generated by each dollar invested in assets. A high return on assets number indicates a profitable company. = the higher the better The ratio that shows the profitability of assets used in the earnings process is the return on assets. As with other ratios, the return on assets should be compared to previous years, to other companies in same industry and to industry averages. Net Average Return on IncomeTotal Assets Assets  =

P500 E9.11, E9.12 (parts which deal with Goodwill) P501 E9.13 and E9.14 P506 P9.11 (optional) and P9.13 (optional) Classwork / Homework