accounting treatment of goodwill

The traditional measurement of goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration given by the parent over the parent’s share of the fair value of the net assets acquired. Goodwill is an intangible asset which represents the future economic benefit arising from assets which cannot be recognised separately. And, FASB Accounting Standards Update No. In this video, i will teach you about treatment of goodwill in change in profit sharing ratio. The Accounting Treatment of Goodwill, Idiosyncratic Risk, and Market Pricing Show all authors. and of the accounting treatm ent of the goodwill offering more transparency to the operations of business combinations as regards the shareholders … The accounting treatment for goodwill remains controversial, within both the accounting and financial industries, because it is, fundamentally, a workaround employed by accountants to compensate for the fact that businesses, when purchased, are valued based on estimates of future cash flows and prices negotiated by the buyer and seller, and not on the fair value of assets and liabilities to be transferred … Request Information > Prospective Students If the new partner pays his share of the fame amount privately to the old partner, then no entry will be made in the books of the firm, as the amount of fame is not written in the firm. To calculate it, simply subtract the total asset market value amount from the purchase price; this amount is nearly always a positive number. Y’s share in goodwill = 60,000 x (2/6) = Rs. 2. This is because, the goodwill is earned with the help of his capital and efforts invested by him in the business. Search Google Scholar for this author, Danielle Xu 2. We aim to help students and accounting professionals equally. The goodwill earned by the firm is the result of the efforts of all the existing partners in the past. Student Login >. End User Agreement Goodwill represents the reputation of a firm which provides some extra benefits/profits in the future in comparison to other firms. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. 75,000. The treatment of goodwill evolved considerably between the issuance of Accounting Research Bulletin 24 (ARB 24), Accounting for Intangible Assets, in 1944, and the publication of SFAS 142 in 2001. When the new partner brings his share of the cash. The retiring or deceased partner is entitled to his/her share of goodwill at the time of retirement/death. The journal entry for adjustment of goodwill will be : As the name suggests, goodwill of this kind is not present by its name rather it is hidden in the amount so adjusted in the retiring or deceased partner’s capital account. Unit Number 319, Vipul Trade Centre, Sohna Road, Gurgaon, Sector 49, Gurugram, Haryana 122018, India, Monday – Friday (9:00 a.m. – 6:00 p.m. PST) Saturday, Sunday (Closed), Meaning and Characteristics of Not-for-Profit Organisation, Accounting Records of Not-for-Profit Organisations, Maintenance of Capital Accounts of Partners, Modes of Reconstitution of a Partnership Firm, Adjustment for Accumulated Profits and Losses and Capitals, Revaluation of Assets and Reassessment of Liabilities, Change in Profit Sharing Ratio among the Existing Partners, Ascertaining the Amount Due to Retiring/Deceased Partner, Adjustment for Revaluation of Assets and Liabilities/Adjustment of Accumulated Profits and Losses, Disposal of Amount Due to Retiring Partner. Goodwill is sometimes separately categorized as economic, or business, goodwill and goodwill in accounting, but to speak as if these were two separate things is an artificial and misleading construct. 844-PURDUE-G From an accounting and fiscal point of view, the goodwill is not subject to amortization. C retires, and it is decided to settle his account by paying him Rs. Accounting Treatment For Goodwill On Admission Of A Partner: In case of admission of a new partner, goodwill may be treated in any of the following case: When the new partner brings his share of premium for goodwill in cash. 20,000. The standard suggests six examples of intangible assets: 1. Under generally accepted accounting principles (GAAP) and the Financial Accounting Standards Board (FASB) rules and guides, goodwill represents the premium for buying a business for a higher price due to the intangible assets that may justify a higher price than that supported by the identifiable assets of that business. Goodwill can be informally understood as the price paid during acquisition of an existing business that is above the cumulative net value of all the assets of the acquired business. Gonzaga University, Spokane, WA, USA See all articles by this author. The Financial Accounting Standards Board (FASB) revised U.S. generally accepted accounting principles (GAAP) to include alternatives for private companies’ treatment of goodwill. Licences 2. Learn more about online programs at Purdue Global and download our program guide. Site Map, Homeland Security and Emergency Management, Adult-Gerontology Acute Care Nurse Practitioner, Adult-Gerontology Primary Care Nurse Practitioner, E-leadership: Leadership in the Twenty-First Century, A Guide to Financial Statement Fraud, Red Flags, and Prevention Tips, ExcelTrack Master of Business Administration, View All Criminal Justice Degree Programs, View All Information Technology Degree Programs, ExcelTrack Bachelor of Science (RN-to-BSN), View All Professional Studies Degree Programs, https://basepub.dauphine.fr/bitstream/handle/123456789/2638/fulltext%20EAA2007.pdf, http://dx.doi.org/10.1108/JIC-09-2015-0081, http://bakertilly.com/insights/fasb-accounting-standards-offer-gaap-relief-for-private-companies/, http://www.accountingtoday.com/news/FASB-Endorses-Changes-Accounting-Standards-Goodwill-Interest-Rate-Swaps-68849-1.html, http://www.fasb.org/cs/ContentServer?pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176163742955, http://www.investopedia.com/terms/g/goodwill.asp#ixzz3xdYecoZH. Consideration £1.6 Net assets £1.2? Chapter 1 – Accounting for Not-for-Profit Organisation, Chapter 2 – Accounting for Partnership:  Basic Concepts, Chapter 3 – Reconstitution of a Partnership Firm, Chapter 4 – Reconstitution of a Partnership Firm, Chapter 5 Dissolution of Partnership Firm. One alternate method for goodwill states that it should be tested for impairment when a triggering event occurs that indicates that the fair value of the goodwill may have fallen under its current book-value. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. Marinilka B. Kimbro . So the difference is treated as Hidden Goodwill. Copyrights 5. Seattle University, WA, USA See all articles by this author. In such a scenario, the accounting treatment for goodwill will rely on whether or not goodwill already exists in the company books. When the account of retiring or deceased partner is settled by paying him a lump sum amount, then the excess amount over what is due as calculated by carrying out the adjustments is assumed as the amount paid for goodwill. Marinilka B. Kimbro 1. Patents 4. Journal of Intellectual Capital, 17,(1), 120 – 147. This process could become costly and unwieldy (FASB, 2014). The Financial Accounting Standards Board (FASB) revised U.S. generally accepted accounting principles (GAAP) to include alternatives for private companies’ treatment of goodwill. Despite this, many respondents still favoured an impairment-only approach, and it is this approach that the IASB is largely focusing on. 1. However, accounting rules require businesses to test goodwill for impairment after a … These include: For an amalgamation to be termed as Merger, following conditions need to be satisfied: 1. Copyright © 2020, Purdue University Global, Inc., a public, nonprofit institution. A private company that elects the impairment alternative must adopt an accounting policy to test goodwill for impairment at the appropriate organizational level.The other alternative is the amortization method (Cherry-Bekaert, 2015). Accounting Today. ACCOUNTING TREATMENT of GOODWILL. When goodwill is not appearing in the books of accounts –, The following journal entry is passed in this case –. 866-522-7747 The accounting treatment for such goodwill adjustment is decided by the fact that the goodwill is appearing in the books of the firm or not. Y retired and the value of goodwill of the firm in valued at Rs. 2. When the new partner brings his share of goodwill in cash and is retained in business. And, FASB Accounting Standards Update No. The Accounting Treatment of Goodwill, Idiosyncratic Risk, and Market Pricing Show all authors. the accounting treatment of goodwill to one method, namely the capitali­ sation and amortisation method. It is an item whose accounting treatment produces both conceptual and practical problems, with remarkable impli- cations on the true and fair view. The standard deals with accounting treatment of intangible assets, goodwill and business... IASB issued IFRS 3- Business and Combination. Privacy Policy A more formal definition of goodwill is: “An intangible asset that arises as a result of the acquisition of one company by another for a premium value. The views expressed in this article are solely those of the author and do not represent the view of Purdue Global. What is referred to as “accounting goodwill” is really just the recognition in accounting of a company’s “economic goodwill”.Accounting goodwill is sometimes defined as an intangible asset that is created when a company purchases a… (adsbygoogle = window.adsbygoogle || []).push({}); 1. FRS 6 seems to suggest that Goodwill should be taken through the Restructuring reserves in balance sheet. As mentioned earlier, the carrying value of a business does not always equal the fair value (or the estimated value that someone in the market would pay for the business). Accounting Treatment of Goodwill in IFRS and US GAAP. There are broadly two categories of amalgamations. Treatment of Goodwill. #T. S. Grewal#Pukhraj Purohit#Accounting Treatment Of Goodwill We will evaluate your JST and civilian transcript for credit and determine the most efficient path to your chosen degree. Subtract the book value from the purchase price to calculate Goodwill. OODWILL is usually only recorded in an accounting system when a company purchases an unincorporated business or acquires a subsidiary or associated undertaking and prepares consolidated accounts. When goodwill is not appearing in the books of accounts – The following journal entry is passed in this case – For eg – X, Y and Z are partners in a firm sharing profits in the ratio of 1:2:3. This difference between the purchase price and the firm's market value is called goodwill. It provides for the following treatment of Goodwill in the case of amalgamation in the nature of purchase: 1) Goodwill arising on amalgamation represents a payment made in the anticipation of future profits and it is appropriate to show it as asset in the books of accounts. When one company acquires another entire company, the purchase price is likely to exceed the total value of the acquired firm's net identifiable assets. FASB accounting standards offer GAAP relief for private companies. 60,000. To know more, stay tuned to … For example, if the net value of an acquired business’s assets is $1,000,000 but the purchase price of that business is $1,250,000, then “goodwill” would be $250,000. The accounting treatment of goodwill will be explained with the different method as following: – (a) उतार-चढ़ाव वाले कैपिटल अकाउंट के मामले में (In the case of Fluctuating Capitals … 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, permits a private company to amortize goodwill on a straight-line basis over a period of 10 years (Mirea, 2013). It is not a fictitious asset. The article presents an overview of the new accounting treatment of goodwill regarding International Financial Reporting Standards and American Generally Accepted Accounting Principles. Thus, upon retirement or death of a partner, he is entitled to his share of goodwill and the subsequent treatment of goodwill depend on whether the goodwill amount is recorded in the books of accounts. 1Seattle University, WA, USA See all articles by this author. Apply Now >, Current Students Upon amalgamation, all assets and liabilities of the transferor company become the assets and liabilities of the transferee company. Research indicates that new rules allowing more flexible treatment of goodwill expense dramatically impacts managers’ behavior when presenting financial statements (Caruso, Ferrari & Pisano, 2016).Stanley W. Self, CFE, is a professor at Purdue Global. Trademarks The standard recognises that these may be treated as separate types of intangible assets, but also states that further subdivision of these may be appropriate in individual circumstances (for example where different types of licence have different functions within the business). Subsequent accounting for goodwill Many participants from the PIR suggested reintroducing amortisation of goodwill, believing it reflects the consumption of the resources acquired over time. First … Carillion’s bankruptcy destroyed jobs and further destabilised confidence in the UK economy. X and Z continue the business sharing profits in the ratio of 3:1. Danielle Xu. Launch a Career in Financial Analysis With a Business Administration Degree, 3 Reasons Why You Should Study Business Administration. Franchises 6. The above mentioned is the concept that is explained in detail about Treatment of Goodwill for the class 12 Commerce students. FASB Endorses Changes in Accounting Standards for Goodwill and Interest Rate Swaps. Accounting treatment of Goodwill: partnership 1. Marinilka B. Kimbro 1. Search Google Scholar for this author, Danielle Xu 2. Danielle Xu . In the late 1800s, a business combination or acquisition generally presented the exchange of assets in which the acquired company’s historical (or book value) was less than the value of the cash paid or stock shares issued. Caruso, G., Ferrari, E., & Pisano, V. (2016). On the other hand, the Transferee Company is a company into which the Transferor Company gets amalgamated. We offer 175 programs, including associate's, bachelor's, master's, and doctoral degrees as well as certificates, in areas such as business, IT, education, health sciences, nursing, criminal justice, and more. Hence, as per agreement among the partners at the time of retirement/death of a partner, goodwill is valued. So at the time of retirement/death of a partner, the adjustments are made to value goodwill as per the agreement between the partners and the the retiring/ deceased partner is compensated for his share in the goodwill by the remaining partners in their gaining ratio. Earnings management and goodwill impairment. X …    |       |    The solutions presented in the international referential generated a reconciliation of the theoretical vision and of the accounting treatment of the goodwill offering more transparency to the operations of business combinations as regards the shareholders and social partners as well as the subsequent treatment of the expenses with this intangible asset on the financial results of the societies… All rights reserved. In this scenario, I have a debit balance of €400k i.e. The relief from the requirement to test goodwill for impairment at least annually is expected to result in significant cost savings for many private companies.Although the new treatment only extends to private companies for now, FASB also recently decided to add a project to its agenda on the subsequent accounting for goodwill for public companies and not-for-profit organizations (FASB, 2014).One very interesting related topic for future discussion is the effect that adoption of new goodwill amortization and impairment GAAP policies may have is on the increased use of “earnings management” by organizations. If you like to contribute to our blog please contact us at details given on contact us page. The concept of the “time value of money” will also be an important consideration. A, B and C are partners in a firm and their profit sharing ratio is 3:2:1. © 2020, Arinjay Academy. The accounting treatment for such goodwill adjustment is decided by the fact that the goodwill is appearing in the books of the firm or not. Does anyone know the treatment of goodwill on consolidation under GAAP? Retrieved from http://dx.doi.org/10.1108/JIC-09-2015-0081BakerTilly (2015, February). Under certain circumstances, another useful life is allowed when it can be demonstrated that it is appropriate. Goodwill made its entrance into accounting during the nineteenth century. Search Google Scholar for this author. Quotas 3. This is treated as intangible assets in accounts. The subsequent accounting treatments for goodwill are, however, marked with huge complexities, both from a technical and judgmental perspective (Bepari, Rahman and Mollik 2014;Wines et … Marinilka B. Kimbro. Accounting Treatment of Goodwill- Death/Retirement of Partner. Retrieved from http://www.investopedia.com/terms/g/goodwill.asp#ixzz3xdYecoZH. Despite the fact that the … Retrieved from http://www.accountingtoday.com/news/FASB-Endorses-Changes-Accounting-Standards-Goodwill-Interest-Rate-Swaps-68849-1.htmlFASB (2014, January 16) FASB issues two updates for private companies on accounting for goodwill, interest rate swaps. Purdue University Global delivers a fully personalized, world-class education online that's tailored for adults. Sharehol… Goodwill is an accounting concept that is used when dealing with acquisitions. When the new partner does not bring his share of goodwill in cash. Determine the fair value of the company's assets. 60,000. Whereas, after all adjustments the amount due to him is worked out to be Rs. Home » Accountancy Class 12 » Treatment of Goodwill. Goodwill is defined as the price paid in excess of the firm's fair value. At Fundamentals of Accounting, our objective is to present complex accounting concepts in an easy and understandable manner. Under certain circumstances, another useful life is allowed when it can be demonstrated that it i… When amount of Goodwill is paid privately. The goodwill account can be found in the assets portion of a company's balance sheet” (Investopedia, 2016).Any individual or company that acquires another ongoing business operation will be extremely interested in the disposition of goodwill because of the potential effects on the financial statements and ultimate tax treatment for related accounts (Cohn, 2013). The Accounting Treatment of Goodwill Goodwill is calculated and categorized as a fixed asset in the balance sheets of a business. Goodwill acquired through a business combination is no longer amortized but tested for impairment. Y retired and the value of goodwill of the firm in valued at Rs. In those early instances, the difference was capitalized under the equity heading titled “goodwill.” The inclusion of goodwill was roundly criticized as a form of financial statement management and, “a device of stock watering manipulations: such an item is not merely immaterial, but also imaginary.” (https://basepub.dauphine.fr/bitstream/handle/123456789/2638/fulltext%20EAA2007.pdf).Subsequent Major GAAP pronouncements that revised Goodwill Accounting during the twentieth century allowed goodwill accounting to evolve from the abolition of goodwill as a valid accounting treatment into a technique that required the annual analysis for impairment of goodwill. Commerce students Analysis with a business Administration Degree approach that the IASB is largely focusing on in to! After all adjustments the amount due to him is worked out to be as... Career paths, please select an area of study his capital and invested! From an accounting concept that is explained in detail about treatment of goodwill regarding International Financial Reporting and!, Idiosyncratic Risk, and it is appropriate delivers a fully personalized, education! B accounting treatment of goodwill pay 17,500 to a as compensation for sacrificing his share of goodwill in change in sharing... Ratio 3:2 ) //bakertilly.com/insights/fasb-accounting-standards-offer-gaap-relief-for-private-companies/Cohn, M. ( 2013, November 25 ) personalized, world-class education online that 's for! As a fixed asset in the books of accounts –, the accounting treatment of goodwill of the transferee is! This is because, the goodwill is not a physical asset like buildings or equipment 2FFASBContent_C % 2FNewsPage cid=1176163742955Investopedia! Determine the fair value: //www.fasb.org/cs/ContentServer? pagename=FASB % 2FFASBContent_C % 2FNewsPage & cid=1176163742955Investopedia 2016... Be Rs in the business useful life is allowed when it can be demonstrated it. The purchase price to calculate goodwill career in Financial Analysis with a business Combination is no longer amortized tested... Is the concept of the efforts of all the existing partners in the sheets... Sharehol… Home » Accountancy class 12 » treatment of goodwill, Idiosyncratic Risk, Market. Is retained in business this video, I have a debit balance of €400k i.e download. The assets and liabilities of the company 's assets as Merger, following conditions need to be as. Is worked out to be termed as Merger, following conditions need to be termed Merger... Referred to as the proportionate method prospective students 844-PURDUE-G Request Information > Apply >! During the nineteenth century into which the Transferor company means the company gets... During the nineteenth century fully personalized, world-class education online that 's tailored for adults, Inc. a! The future economic benefit arising from assets which can not be recognised.!, ( 1 ), 120 – 147 be demonstrated that it is an intangible asset represents! To a as compensation for sacrificing his share of the firm 's value... Delivers a fully personalized, world-class education online that 's tailored for adults search Google for! … the accounting treatment of goodwill in cash and business... IASB issued IFRS 3- business Combination... Ratio of 1:2:3 both conceptual and practical problems, with remarkable impli- cations the! Company means the company books price to calculate goodwill those of the cash this is because, goodwill! The most efficient path to your chosen Degree: //www.fasb.org/cs/ContentServer? pagename=FASB % 2FFASBContent_C 2FNewsPage... Profits in the ratio of 3:1 the partners at the time of retirement/death a., including associated career paths, please select an area of study an area of study mentioned is the of! In valued at Rs 3- business and Combination an important consideration you like to contribute to our blog please us!, a public, nonprofit institution us at details given on contact us details... Worked out to be satisfied: 1 Generally Accepted accounting Principles all authors American Generally Accepted Principles! Fixed asset in the balance sheets of a business Combination is no longer but... Rate Swaps C retires, and it is an intangible asset because it is decided to his. 2/6 ) = Rs a as compensation for sacrificing his share of premium for goodwill will rely whether. The cash the result of the author and do not accounting treatment of goodwill the view of Purdue.... An overview of the cash guide, including associated career paths, please select an of. This article are solely those of the author and do not represent view... New accounting treatment produces both conceptual and practical problems, with remarkable impli- cations on the other hand the. In this scenario, the transferee company is a company into which the Transferor company means the that! Is used when dealing with acquisitions of premium for goodwill will rely on whether not. Bring his share of goodwill of the transferee company assets: 1 asset... Company books students and accounting professionals equally as Merger, following conditions need to be satisfied: 1, tuned... Be Rs and categorized as a fixed accounting treatment of goodwill in the UK economy ) = Rs like contribute. I have a debit balance of €400k i.e all articles by this author, Danielle Xu 2 subtract the value... Not a physical asset like buildings or equipment company gets amalgamated into another.... A physical asset like buildings or equipment as the proportionate method one of our degrees designed specifically for military,... Assets and liabilities of the efforts of all the existing partners in a firm which provides some extra benefits/profits the... The cash ( 2013, November 25 ) all assets and liabilities of the efforts of all the partners. Decided to settle his account by paying him Rs point of view, the accounting for! 175+ programs for adults benefit arising from assets which can not be recognised separately Standards for and! Launch a career in Financial Analysis with a business Administration the fair value about. Of Purdue Global program guide nineteenth century, nonprofit institution case – cid=1176163742955Investopedia... And is retained in business life is allowed when it can be to. Gaining ratio 3:2 ) video, I have a debit balance of €400k i.e personalized world-class! Many respondents still favoured an impairment-only approach, and it is not subject amortization... The following journal entry is passed in this case – called goodwill associated career,! The assets and liabilities of the cash American Generally Accepted accounting Principles fasb, 2014 ) given contact. Existing partners in the gaining ratio 3:2 ) does not bring his share of goodwill is defined as the paid... Represent the view of Purdue Global a company into which the Transferor means. Administration Degree in profit sharing ratio pay 17,500 to a as compensation for sacrificing share... By him in the future economic benefit arising from assets which can not be recognised separately cid=1176163742955Investopedia ( )., ( 1 ), 120 – 147 agreement among the partners at time... In detail about treatment of goodwill in IFRS and us GAAP earned with the help of his capital efforts., with remarkable impli- cations on the true and fair view 's assets many respondents still favoured an approach! Author, Danielle Xu 2 through the Restructuring reserves in balance sheet will evaluate your and. It can be demonstrated that it is this approach that the IASB is largely focusing on profits. Spokane, WA, USA See all articles by this author, goodwill is an accounting concept is! November 25 ) students, or choose from one of our 175+ programs have a debit balance of i.e! That goodwill should be taken through the Restructuring reserves in balance sheet destroyed jobs and further destabilised confidence the. In the past partners in the past of Intellectual capital, 17, ( 1 ), 120 –.... You like to contribute to our blog please contact us page ( { } ;! Analysis with a business Combination is no longer amortized but tested for impairment to other firms guide, including career. Our program guide... IASB issued IFRS 3- business and Combination for goodwill will rely on whether or not already... With acquisitions and determine the most efficient path to your chosen Degree is! Profits in the company that gets amalgamated into another company whose accounting for... It is not subject to amortization Endorses Changes in accounting Standards offer GAAP relief for private.! And unwieldy ( fasb, 2014 ) IFRS and us GAAP change in profit sharing ratio February ) earned the... With acquisitions Standards offer GAAP relief for private companies 17, ( 1 ), 120 – 147 detail... Do with a business Administration Degree, 3 Reasons Why you should business! Or equipment exists in the UK economy of accounting, our objective is to present complex accounting concepts an... 2/6 ) = Rs to our blog please contact us page: //bakertilly.com/insights/fasb-accounting-standards-offer-gaap-relief-for-private-companies/Cohn, M. ( 2013, 25... Goodwill for the class 12 Commerce students concept that is used when dealing with acquisitions all adjustments the due! Represent the view of Purdue Global not goodwill already exists in the company that gets amalgamated into company... Adsbygoogle = window.adsbygoogle || [ ] ).push ( { } ) ; 1 efforts of the. Current students 866-522-7747 Student Login > and Z are partners in a firm which provides extra... Retired and the value of goodwill in cash and is retained in business ( ). Earned by the firm in valued at Rs not appearing in the future in comparison to other firms jobs further... S share in goodwill = 60,000 x ( 2/6 ) = Rs this article are solely those of the in... Means the company 's assets students and accounting professionals equally, please select an area of study be... Item whose accounting treatment of goodwill at the time of retirement/death worked out to be satisfied: 1 of!, many respondents still favoured an impairment-only approach, and it is an intangible asset because it is.. 2014 ) problems, with remarkable impli- cations on the other hand the... Of 3:1 & Pisano, V. ( 2016 ) a as compensation for his!, following conditions need to be Rs by him in the gaining ratio 3:2 ) Pricing... Should study business Administration Degree, 3 Reasons Why you should study business Administration Degree 3! 3- business and Combination, and it is an accounting concept that is used when dealing with acquisitions fact the... On contact us page International Financial Reporting Standards and American Generally Accepted accounting Principles satisfied: 1 3-!, all assets and liabilities of the Transferor company gets amalgamated into another company of retirement/death here Transferor!

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