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| Corporate Accounting Treatment |
Accounting treatment for goodwill-With Practical Examples:
Goodwill is an intangible asset that arises when one company acquires another for a price higher than the fair value of its identifiable net assets (i.e., assets minus liabilities). The excess of the purchase price over the fair value of the acquired company's identifiable assets and liabilities is recorded as goodwill. Here's a breakdown of how goodwill is treated in accounting:
1. Initial Recognition of Goodwill:
Goodwill is recognized in the books only in the context of a business combination. It is calculated as:
Practical Example:
Let's assume Company A acquires Company B for $10 million. The fair value of Company B's identifiable net assets (assets minus liabilities) is $8 million. The difference between the purchase price and the fair value of the net assets ($10 million - $8 million = $2 million) is recorded as goodwill.
Journal Entry to Record Acquisition with Goodwill:
Dr. Assets (specific assets acquired) $8,000,000
Dr. Goodwill $2,000,000
Cr. Liabilities (liabilities assumed) $X
Cr. Cash or Bank (purchase price paid) $10,000,000
2.Subsequent Measurement (Amortization vs. Impairment):
Goodwill is not amortized but is subject to impairment testing under both IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles).
A. Impairment Testing:
At least annually (or more frequently if there are indicators of impairment), companies must test whether the carrying value of goodwill exceeds its recoverable amount. If it does, an impairment loss is recognized in the profit and loss statement.
Practical Example of Impairment:
Suppose Company A tests its goodwill a year later and finds that the recoverable value of the business unit is $9 million, but the carrying amount (assets plus goodwill) is $11 million. The goodwill is impaired by $2 million ($11 million - $9 million).
Journal Entry for Goodwill Impairment:
Dr. Impairment Loss (in Profit & Loss Statement) $2,000,000
Cr. Goodwill $2,000,000
3.Goodwill in Financial Statements:
Goodwill appears as an intangible asset on the balance sheet. It is not amortized but remains on the balance sheet unless impaired.
Practical Example - Balance Sheet Presentation:
After Company A's acquisition of Company B, and after recognizing the impairment, its balance sheet would show:
Total assets, including goodwill ($8 million identifiable assets + $2 million goodwill)
Impairment loss shown as an expense in the income statement
In Finally:
In accounting, goodwill is initially recorded at its acquisition value and tested annually for impairment. Unlike tangible assets, it is not amortized but instead adjusted if an impairment is found.