The Generally Accepted Accounting Principles (GAAP) require that goodwill be recorded only when an entire business or business segment is purchased. For example, suppose you are selling an outstanding product or providing excellent service consistently. There is a rebuttable presumption that this will not exceed 20 years but in some instances the useful economic life may be viewed as longer than 20 years or indeed indefinite (therefore no amortisation). Impairment reviews must be undertaken, particularly if the goodwill or intangible asset is regarded as having an infinite life and is therefore not being amortised. Policy objective In accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. The obvious example is where the business was started after 1 April 2002. Solution As Pratt Co gained control of Swann Co on 1 January 20X1, the goodwill needs to be calculated on this date. Total up the fair value of any intangible assets identified in the purchase process. Add these two together to get a total of $15 million. Purchased goodwill and intangible assets should be amortised over their useful economic life. Purchased goodwill is the difference between the value paid for an enterprise as a going concern and the sum of its assets less the sum of its liabilities, each item of which has been separately identified and valued. For example, the drinks company Coca-Cola – which has been around since 1886, makes a popular product based on a secret formula, and is generally perceived positively by the general public – has a lot of goodwill. Purchased goodwill is an intangible asset, which appears in the consolidated statement of financial position. For example, if your excess purchase price is $400,000 and your fair value adjustment is $100,000, your goodwill amount would be $300,000. Fast forward to 2015 - when they sold a book of business (among other assets). Goodwill arises when the cost of the combination exceeds the fair value of the identified net assets acquired; for example, if CU100m is paid for CU75m of net assets, then goodwill of CU25m arises. Obviously, in that case, the goodwill couldn't have been held by the related transferor (or anyone else) on 1 April 2002 because it didn't exist then. Certain countries (for example, the Netherlands, Germany and Italy) give tax relief for the amortisation of purchased goodwill. Sale of Purchased Goodwill. The value of a company’s brand name, solid … Well simply, it’s reliably measurable. The excess is accounted for as ‘negative goodwill’. Related Content. purchased goodwill and certain customer related intangible assets. Para 36 of AS-10 ‘Accounting for fixed assets’ states that only purchased goodwill should be recognized in the books of accounts. Purchased goodwill arises when a business concern is purchased and the purchase consideration paid exceeds the fair value of the separable net assets acquired. During this process, the price of the business will determine the value of the goodwill. Note that the acquirer need not be the larger of the two entities. Goodwill is an intangible asset for a company, such as a brand name or intellectual property. Many entities will be amortising goodwill over a longer period (for example 10 years) and this should continue under FRS 102 if this is a reliable estimate of the goodwill’s useful economic life. This follows the same logic as above example but appears to be nonsense. You might know already that internally generated goodwill cannot appear as an intangible asset in the statement of financial position, so why are we allowed to include purchased goodwill. For example, a private entity arranges to have itself “acquired” by a smaller public entity as a means of obtaining a stock exchange listing. Purchased goodwill is defined as the difference between the cost of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities. Shown in the Balance Sheet as an asset. This situation may arise for example where a business is acquired at a bargain price. Company A acquires Company B, with goodwill valued at £450,000, and patents held valued at £50,000. CALCULATION OF RELIEF – EXAMPLE. FRS 10 and the FRSSE define intangible assets as non-financial fixed assets that do not have a physical substance but are identifiable and are controlled by the entity through custody or legal rights. the entity that obtains 'control' of the acquiree. Secondly, there is a specific provision in s118(2)(c) where the related transferor acquires the goodwill from a third party after 1 April 2002. 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