Nov 2019 Q5 d.
Negative Goodwill is based on the accounting concept of Goodwill, an intangible asset that represents the worth of a company’s brand name, patents and other intellectual property, customer base, licenses, and other items that are difficult to put an amount on but help to make a company valuable. When the price paid is less than the actual value of the company’s net tangible assets, negative Goodwill results.
Required:
In accordance with IFRS 3: Business Combinations, Identify THREE (3) factors that account for a negative Goodwill and indicate its accounting treatment when it occurs in the preparation of consolidated financial statements. (5 marks)
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Where the cost of the business combination is greater than the net assets acquired, the investor has paid for something more than the net assets of the acquired business. The difference is called goodwill and is measured in accordance with (IFRS 3: Business Combinations – revised). Purchased goodwill is positive when the cost of investments exceeds the net fair value of identifiable assets, liabilities and contingent liabilities. In accordance with IFRS 3; Business combination, negative goodwill occurs when the acquired net assets exceed cost of investment.
Factors accounting for negative goodwill includes but not limited to:
1. The acquirer may be good in the negotiations of the purchase consideration than the acquiree.
2. The acquiree has no knowledge of the value of its business before and during the sale transaction
3. The acquire is desperate to sell in a force sale transaction
Accounting treatment of purchased goodwill
Positive purchased goodwill is capitalised on the consolidated balance sheet or statement of financial position and subject to an impairment test annually. Subsequent impairment test is charged to profit or loss as expenses. Impairment tests are conducted at least at each year end. Any resulting impairment loss is first recognized against consolidated goodwill.
However, purchased goodwill if negative is not capitalized since it represents a gain to the acquirer and hence IFRS3 business combination requires that it is recognized in the statement of profit or loss immediately after the reassessment and confirmation.
*Factors (1 mark up to a maxim of 3 points) – 3 marks
*Accounting treatment and impairment – 2 marks