Question

How to recognize goodwill in parent theory and entity? When does it have a credit balance?

Answer 1

Starting point with Goodwill under Parent theory is less than the goodwill under entity theory mainly because Goodwill is established based on the parent acquisition cost . Goodwill is the difference between the amount paid and the book value of the net asset re acquired .

Goodwill derived as per IFRS 3 Business combination –

Goodwill = Consideration received + Amount from NCI ( NonControlling Interest) + fair value of previously equity Interest – net Asset value recognised

Purchased goodwill is recognised in group accounts due to business combinations of the basis that it is brought into being by the combination of two entities . Parent entity pays for purchased goodwill in the subsidiary at the date of acquisition .

Contingent consideration – fair value of accounting at the acquisition date subsequent changes do not impact goodwill but are accountable separately

When does it have a credit balance?

Goodwill is considered as Intangible asset. At the time of business purchased , goodwill will be equal to the amount the purchase price is above book value of the business . Goodwill is the price paid in excess of the firms value . Simply deduct total asset market value from the purchase price , the amount always a Positive number

As per USGAAP + IFRS ,every year , goodwill need to run through Impairment testing . If some issue in Impairment testing then market value of asset might go down to below book value . In this scenario, goodwill need to be reduced by the amount the market value falls below book value .

Other way Negative goodwill arises on an acquirer financial statement when the price paid for an acquisition is less than the fair value of its net tangible assets

Negative goodwill implies bargain purchase and acquire immediately records and extraordinary gain on its income statement .

For purchased company , negative goodwill often indicates a distressed sale