Question

For intangible asset "Goodwill":

What happens if the amount paid for a business is less than the fair value of the net identifiable assets acquired in a business combination. what journal entries need to be record?

Answer 1

In cases of acquistion,merger and amalgamation the acquirer or buyer company will pay lumpsum amount or equity shares to the seller company or its shareholders , primarily know as Purchase Consideration. It priama facie creates two scenarios as below:

1. Amount paid in purchase consideration is more than the fair value of acquired net identifiable assets of seller company. This add on amount is known as Goodwill of seller comapny for which excess amount/consideration has been paid.

2. Amount paid in purchase consideration is less than the acquired fair value of net identifiable assets of seller comapny. This cut on amount is known as Bargain Purchase or Negative Goodwill which helps the buyer to acquire assets less than fair value.

In given case, scenario 2 is applicable and it is case of bargain purchase.

Accounting treatment of bargian purchase/Negative Goodwill

All acquired assets of Selling Comapny Dr.    At fair value

To acquired liablitites of selling company At fair value/ At settled amount

To Purchase Consideration Amount paid to Selling company for acquisition

To Gain on Bargain Purchase    At Difference/Balancing amount

(Being acquistion made and Bargain gain accounted for)

and later this Gain on bargan purchase will be considered as gain of acquirer as per IFRS 3 and will be recognised in statement of profit and loss for the year.

Gain on Bargain Purchase Dr    Above computed amount

   To Profir & Loss Account Above Computed Amount

(being gain transferred to Profit and loss)