Financial Statements

net profit

Goodwill is a class of intangible asset which arises when you acquire a business. Goodwill is the surplus of price paid for the target's shares over the net assets of the target (net assets = book value of equity = total assets less total liabilities = shareholders' equity = shareholders' funds).

Writing down goodwill under IFRS

Under IFRS (international financial reporting standards) the value of goodwill is checked each year under an "impairment test" and goodwill is written down if a valuation shows that the acquired target is not worth as much as previously thought. An example is the UK bank RBS's 2007 acquisition of Dutch bank ABN Amro. In 2009 RBS revealed the biggest loss in UK corporate history after it impairment tested ABN Amro and wrote down the value of its investment.

Writing down goodwill under other accounting regimes

Under other accounting regimes e.g. UK and Dutch generally accepted accounting practice, goodwill is amortised or written down a little bit each year, just like depreciation on fixed assets.

Lessons for financial modelling in Excel - the simple solution

If you are trying to model an acquisition by a business that accounts under IFRS, the simplest way to model goodwill is to assume no future forecast change. It's not going to make much sense to forecast an anticipated write down or other revaluation and, in any case, it's a not a cash item so doesn't affect the business's economics.

The more complicated picture

The picture above is slightly simplified. When one business acquires another, goodwill is generated as described above. At the same time, the acquirer gets an opportunity to revalue the existing assets of the target upwards. The acquirer gets the opportunity to review the target's existing assets and also identify separate intangibles sitting within the target (e.g. a brand or publishing title that can be valued as a separate intangible asset). In effect, this means that the price the acquirer pays for the target can be broken down into:
(i) the fair market value of the target's existing assets and liabilities;
(ii) the value attached to separately identifiable intangibles; and
(iii) goodwill (equals the surplus of price paid for the target's shares over the value of the other two types of assets).

Points (i) through (iii) above provide you with a sense of how balance sheet values could change following an acquisition. In the P&L, following acquisition:
(i) revalued tangible assets will be depreciated, increasing depreciation expense;
(ii) intangibles will be amortised, increasing amortisation expense;
(iii) under IFRS goodwill will be impairment tested each year as per the previous RBS example.

In effect the acquisition process gives the acquirer the chance to:
(i) 'find' some extra tangible assets that can be depreciated;
(ii) 'find' some extra intangibles that can be amortised; and
(iii) reduce the amount of goodwill showing on the balance sheet.

Lessons for financial modelling in Excel: the more complicated solution

When modelling a merger in Excel you could, if you wished:
(i) estimate expected revaluations of tangible assets and increases in depreciation;
(ii) estimate separately identifiable intangibles and increases in amortisation.

Conclusion

Without having gone through a valuation exercise ahead of the acquisition it is going to be very hard to forecast expected revaluations and they are non cash anyway - so it may make more sense to model intangibles as per "the simple solution" above. That is, just calculate goodwill as the surplus of price paid for the target's shares over the net assets of the target and forecast no change/ write down going forward. There are always so many big variables when you are trying to model an acquisition that it's hard to imagine that there is much to gain by super-accurate forecasting of non-cash items.

Financial Training Associates Ltd: the Company

This answer has been provided by Financial Training Associates Ltd, a company that provides in-house training courses in excel financial modelling training, corporate and projecte finance, valuation and related subjects.

Goodwill is the value of reputation of a irm in respect of the profits expected in future over and above the normal rate of return, which other companies can earn. Over and above the normal rate implies that the firms capability to earn more profits when compared to other firms because of its good brand name, locational advantage, good customer relations or possession of a unique patent right. The impact of goodwill on the net income is that, as good will is amortized the amount of profits get reduced. This further reduces the balacne of reserves and surplus amt in the balance sheet.

Quick assets or liquid assets are those assets that can be converted into cash fairly soon... eg, accounts receivable, marketable securities, current assets excluding inventory, etc.

The cash flow statement as the name suggest only recognizes transactions that involve the movement of cash. eg. cash/cheque receipts, payments

Bad debts written off does not involve any movement of cash. You neigther receive cash nor pay cash... therefore, it is an non-cash adjustment


Hope this helps!

Administrative one.

Cash Book

speelling

Yes depreciation is fixed cost because it do not vary with the volume of production and remained fixed whether any production or not.

Yes livestock are fixed assets

budgeted balance sheet

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account receivable and inventory

Trial Balance

surrounds a particular word and helps determine what it means.

Account receivable

My understanding is Accrual = (VOWD - Actual expenditure)

following payment, the approved invoice should be stamped "paid"

Hi,

There is no journal entry for cash shortage as you can never have money less than 0. However if the credit side of the ledger is more than the debit side of the Cash book, the entry passed is Cash/Bank A/C dr......To Bank Overdraft A/C.

There are various type of errors due to which Trial balance is not match. like..

- Posting to wrong side in right Account

- Posting with wrong Amount

- to record entry partly

- other commission errors etc.

Debit assets
Credit accounts payable

Give me an example for what, the transaction would decrease an asset account and decrease the owner's equity account?

Determine that purchases were properly recorded.

Accounts payable's normal entry is credit. when it is at the debit side it could mean: reversal of accounts payable which happens at the end of accounting period, or return of merchandise purchased, or overstatement of purchased merchandise.

The importance of International Accounting Standard is underpinned by the global nature and impact of virtually all business transactions. Investors from different business environments need a standardized form of reporting business transactions to ensure a fair and equitable analysis of businesses, and proper peer-to-peer comparison of businesses operating in different legal jurisdictions. International Accounting Standards enable such analysis and comparison by ensuring that businesses adopt similar fundamental rules in reporting their activities. However, such adoption is dependent on who the business believes are its stakeholders.