Question

Owens Bhd negotiated to acquire most of the issued share capital of Mike Bhd. It was agreed that the business combination would be effected through a share exchange. Owens would issue 5 million of its equity shares and acquire 8 million of Mike's issued shares. This would give Owens 80% control over Mike.

Owes calculated goodwill of Mike, using discounted cash flow and arrived at a value of RM1 million. The fair value of Owens' equity share on the date of business combination was estimated at RM4.

The fair value of identifiable net assets (assets and liabilities) of Mike on that date was RM17 million. Owens wanted Mike to recognise the goodwill of RM1 million in its books.

At the same time, Owens wanted to recognise goodwill for its own business and estimated it to be RM2.5 million.

Required:

Advise Owens on calculating and accounting for Goodwill in Mike and in Owens.

Answer 1

Goodwill is of two types

1. Acquired Goodwill

2. Inherent Goodwill/Self generated goodwill

Acquired Goodwill is one which is the excess of Purchase consideration paid in excess of tha fair value of net assets acquired in a business combination.

Self generated goodwill is such goodwill which is generally generated in the normal course of business and is computed for internal valuation purposes.

Accounting treatment is given as per widely used principles and IFRS (as country of origin for question is not given)

Acquired Goodwill needs to be accounted in books and is not Amortized, it must be tested for impairment throughout its life.

Self generated Goodwill or inherent Goodwill must not be recognised in books.

For the given facts

After acquiring the shares of Mike, the Goodwill must be recognised in the separate financial statements of Owen's at RM0.8 million (1 million x 80%). Mike will not recognise the RM1 million in its books, as this is self generated goodwill.

Owens should not recognise RM2.5 million in its books as this is self generated goodwill.