The accounting for goodwill differs in countries around the world. The discussion of a change in goodwill accounting practices shown below was taken from the notes to the financial statements of J Sainsbury Plc, one of the world’s leading retailers. Headquartered in the United Kingdom, it serves 11 million customers a week.

J SAINSBURY PLC Notes to the Financial Statements Accounting Policies Goodwill arising in connection with the acquisition of shares _ in subsidiaries and associated undertakings is calculated as the excess of the purchase price over the fair value of the net tangible assets acquired. In prior years goodwill has been deducted from reserves in the period of acquisition. FRS 10 is applicable in the current financial year, and in accordance with the standard acquired goodwill is now shown as an asset on the Group’s Balance Sheet. As permitted by FRS 10, goodwill written off to reserves in prior periods has not been restated as an asset.

Goodwill is treated as having an indefinite economic life where it is considered that the acquired business has strong customer loyalty built up over a long period of time, based on advantageous store locations and a commitment to maintain the marketing advantage of the retail brand. The carrying value of the goodwill will be reviewed an- |, nually for impairment and adjusted to its recoverable amount if required. Where good- '

will is considered to have a finite life, amortisation will be applied over that period.

For amounts stated as goodwill which are considered to have indefinite life, no amortisation is charged to the Profi LTTE OTE TT EE OE TD OE RE TO SE Ee A Instructions Answer the following questions.

(a) How does the initial determination and recording of goodwill compare with that in the United States? That is, is goodwill initially recorded in the same circumstances, and is the calculation of the amount the same in both the United Kingdom and the United States?

(b) Prior to adoption of the new accounting standard (FRS /0), how did the company account for goodwill? What were the implications for the income statement?

(c) Under the new accounting standard, how does the company account for its goodwill?

Is it possible, under the new standard, for a company to avoid charging goodwill amortization to net income?

(d) In what ways is the new standard similar to U.S. standards, and in what ways is it different?

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