Question

Essay discussion covering all aspects (recognition, initial measurement, subsequent measurement issues, and derecognition) of the GOODWILL.

Answer 1

Ans- Below are related points to the above mentioned question.

GOODWILL OVERVIEW

One of the first definitions of it appeared in Halsbury's Laws of England, a comprehensive encyclopedia that dates from 1907. The current Halsbury's (4th edition, Vol. 35), states that:

"The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possess."

Goodwill is a long-term (or noncurrent) asset categorized as an intangible asset.

Recognition of Goodwill

Goodwill is recorded when a company acquires (purchases or business combination) another company and the purchase price is greater than 1) the fair value of the identifiable tangible and intangible assets acquired, minus 2) the liabilities that were assumed. Goodwill is reported on the balance sheet as a long-term or noncurrent asset.

IAS 38, "Intangible Assets," does not allow the recognizing of internally created goodwill (in-house-generated brands, mastheads, publishing titles, customer lists, and items similar in substance). The only accepted form of goodwill is the one that acquired externally, through business combinations, purchases or acquisitions.

Further, Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset because it is not an identifiable resource. Expenditure for an intangible item is recognised as an expense.

Measurement of Goodwill

In order to calculate goodwill, the fair market value of identifiable assets and liabilities of the company acquired is deducted from the purchase price. For instance, if company A acquired 100% of company B, but paid more than the net market value of company B, a goodwill occurs.

Under IFRS 3, there are two methods for measuring non-controlling interest

1. Fair value or full goodwill method

2. Non-controlling interest’s proportionate share of the acquiree’s net identifiable assets

IFRS 3 illustrates the calculation of consolidated goodwill at the date of acquisition as: Consideration paid by parent + non-controlling interest – fair value of the subsidiary's net identifiable assets = consolidated goodwill.

Although goodwill is the premium paid over the fair value of an entity during a transaction, goodwill's value cannot be sold or bought as an intangible asset in of itself.Goodwill can be challenging to determine its price because it is composed of subjective values. Transactions involving goodwill may have a substantial amount of risk that the acquiring company could overvalue the goodwill in the acquisition and ultimately pay too much for the entity being acquired. However, despite being intangible, goodwill is quantifiable and is a very important part of a company's valuation.

SUBSEQUENT MEASUREMENT ISSUES

Once the Goodwill is recognised in the books it is than tested for impairement to estimate correct value of goodwill at the end of each financial year and then value is impaired if required. Further to elaborate, Goodwill impairment occurs when the recognized goodwill associated with an acquisition is greater than its implied fair value. Goodwill is a common byproduct of a business combination, where the purchase price paid for the acquiree is higher than the fair values of the identifiable assets acquired. After goodwill has initially been recorded as an asset, it must be regularly tested for impairment.

The examination of goodwill for the possible existence of impairment involves a multi-step process, which is,

1. Assess qualitative factors

2. Identify potential impairement

3. Calculate impairement loss.

DERECOGNITION OF GOODWILL

Goodwill is de recognised in following cases,

When a reporting unit is to be disposed of in its entirety, goodwill of that reporting unit shall be included in the carrying amount of the reporting unit in determining the gain or loss on disposal.

When a portion of a reporting unit that constitutes a business or nonprofit activity is to be disposed of, goodwill associated with that business or nonprofit activity shall be included in the carrying amount of the business or nonprofit activity in determining the gain or loss on disposal.

The amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business or nonprofit activity to be disposed of and the portion of the reporting unit that will be retained.

However, if the business or nonprofit activity to be disposed of was never integrated into the reporting unit after its acquisition and thus the benefits of the acquired goodwill were never realized by the rest of the reporting unit, the current carrying amount of that acquired goodwill shall be included in the carrying amount of the business or nonprofit activity to be disposed of.

That situation might occur when the acquired business or nonprofit activity is operated as a standalone entity or when the business or nonprofit activity is to be disposed of shortly after it is acquired.

Situations in which the acquired business or nonprofit activity is operated as a standalone entity are expected to be infrequent because some amount of integration generally occurs after an acquisition.

When only a portion of goodwill is allocated to a business or nonprofit activity to be disposed of, the goodwill remaining in the portion of the reporting unit to be retained shall be tested for impairment.