- 4 Marks
Question
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 negative goodwill and indicate its accounting treatment when it occurs in the preparation of consolidated financial statements.
Answer
Factors Accounting for Negative Goodwill:
1. Bargain Purchase: This occurs when the acquirer negotiates the purchase consideration effectively, leading to a price lower than the fair value of the acquiree’s net assets.
2. Distressed Sale: Negative goodwill may arise when the acquired company is under financial pressure or is in a forced sale situation, resulting in a lower purchase price.
3. Lack of Knowledge by the Acquiree: If the acquiree is unaware of the true value of their business during the sale, this can lead to negative goodwill.
Accounting Treatment of Negative Goodwill:
- According to IFRS 3: Business Combinations, when negative goodwill arises, the acquirer must reassess the identification and measurement of all identifiable assets, liabilities, and contingent liabilities of the acquiree.
- Once the reassessment confirms that negative goodwill exists, it should not be capitalized. Instead, the negative goodwill is recognized immediately in the Statement of Profit or Loss as a gain on acquisition.
- Topic: Financial Reporting Standards and Their Applications
- Series: NOV 2019
- Uploader: Cheoli