Question

Question 4

MFRS 3 Business Combination permits goodwill to be measured on a ’full goodwill' basis or ‘partial goodwill’ method.

1. Explain goodwill with example.

[2 marks]

2. What is the difference between recognising full goodwill and partial goodwill?

[4 marks]

3. Negative goodwill is also known as bargain purchase. Explain the accounting treatment for bargain purchase in accordance to MFRS 3, Business Combination.

[2 marks

Answer 1

a. Goodwill is intangible asset which is created when one company acquires another company for price higher than the fair market value of its assets.

For example: a Company named XYZ assets minus liabilities is $10 billion , and a company named ABC purchases Company XYZ for $ 15 billion , the premium value following the acquisition is $ 5 billion . This $5 billion will be included on the acquirer’s balance sheet as goodwill

b. Full goodwill is the difference between the total fair value of the target company and the fair value of it net identifiable assets. It is mandatory requirement as per MFRS 3 and optional as per IFRS.

Partial goodwill is the difference between the purchase consideration paid and the acquirer's share of the fair value of the net identifiable assets. Only the acquirer's share of the goodwill is recognized in partial goodwill.

In a nutshell, full goodwill is paying for the whole amount even for the component the company is not intending to purchase while partial goodwill is recording goodwill as percentage of actual bought.

c. Negative goodwill is excess of the entity’s share of the net fair value of the investee’s identifiable assets, liabilities and contingent liabilities. Negative goodwill is to be recognized as income in acquirer’s company.

However, if negative goodwill is lower than the cost of allocated assets to acquiring company, the negative goodwill is set to be adjusted against the book value of that assets.