To: Board of Directors, Software Company
Subject: Recognition of Excess Acquisition Cost as Goodwill
As you are aware, we are in the process of acquiring a portion of the net assets of a product line of Midge Company. The acquisition cost is expected to exceed substantially the current fair value of the identifiable net assets, and the competitor has agreed to sell due to its substantial net losses of recent years. The board of directors has asked if the excess acquisition cost may appropriately be recognized as goodwill.
According to the guidelines issued by both FASB and IAS, the excess acquisition cost over the fair value of the identifiable net assets can be recognized as goodwill if certain conditions are met. Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of the net assets acquired. The following conditions need to be met for the recognition of goodwill:
The excess acquisition cost is due to factors that cannot be separately identified and measured.
The excess acquisition cost is not due to future synergies that are expected to be realized from the combination of the two companies.
The excess acquisition cost is not due to the competitor's past or future profitability or losses.
Based on the above conditions, we believe that the excess acquisition cost in this case can appropriately be recognized as goodwill, as it is due to factors that cannot be separately identified and measured. We recommend that the excess acquisition cost be recognized as goodwill in the financial statements of Software Company.
Please let us know if you have any questions or concerns.
Sincerely,
[Your Name]
Controller, Software Company