Financial Accounting: In an Economic Context

GOODWILL

When one company purchases another for a dollar amount that is greater than the net FMV of the purchased company's assets and liabilities, goodwill is recognized on the purchasing company's balance sheet. Goodwill is a common asset on the balance sheets of major U.S. companies. Accounting Trends and Techniques (2009) reports that of the companies surveyed, 89 percent disclosed goodwill on their balance sheets. For many companies, such as Cisco Systems, Marriott Corporation, and General Electric, goodwill is quite significant. Importantly, goodwill is only recognized when it is acquired in an arm's-length transaction. It is never accrued on the balance sheet. The nature of goodwill and the methods used to account for it are discussed and illustrated in Chapter 8.

In 2008 Flowers Foods acquired the common stock of Holsum Holdings, which operates two bakeries in the Phoenix area. The purchase price was $144 million, and $65 million of that amount was allocated to intangible assets (other than goodwill), which appeared on the 2008 consolidated balance sheet of Flowers Foods. Of the $65 million in intangible assets, over $43 million was allocated to an account called “customer relationships.” This intangible asset does not appear on the balance sheet of Holsum. What do you think this account refers to, and why does it appear on the balance sheet of Flowers Foods but not Holsum? ...