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Write 6 pages thesis on the topic goodwill under business acquisitions. Goodwill computations will be highly affected by effective changes brought in by IFRS 3. Business combinations will now be accou
Write 6 pages thesis on the topic goodwill under business acquisitions. Goodwill computations will be highly affected by effective changes brought in by IFRS 3. Business combinations will now be accounted for only under the purchase method, and merger accounting is banned. Intangible assets will be identified in larger way impacting goodwill as IFRS 3 contains a list of suggestive intangibles. Contingent liabilities will play effective role in goodwill valuation as they will be recognized at fair value.
Henceforth goodwill will not be amortized but will face impairment test will all other intangibles. Non- controlling interests will play effective role in determining the cost of acquisition and thus in goodwill valuation for the acquirer. The cost of restructuring the acquisition will be written off to profit and loss. This will play a part in enhancing goodwill valuation under the purchase method. Excess of cost of acquisition over the fair value of net assets acquired shall be treated as gain or negative goodwill and will be credited to profit and loss.
The major impact is that Goodwill now is considered a permanent asset. IFRS 3 has restricted business combination accounting only under the ‘purchase’ method where “the acquiring company records net assets received at fair value at the date of combination. Any excess of cost over the fair value of net assets is allocated to goodwill.” (Venkatesan Sundarrajan, 1995)1. The fair value of net assets is calculated by deducting the fair market value of liabilities (including contingent liabilities) undertaken from the fair value of identified tangible and intangible assets acquired, and goodwill is the difference between the cost of acquisition and the fair value of net assets acquired on the acquisition date.
Though goodwill was also earlier being recorded as a residual value under business combinations, IAS 22 in addition thereto permitted amortization of goodwill over useful life, which was considered as 20 years. .
