Question

A Ltd acquired all issued shares of B Ltd. B Ltd recorded goodwill in its books prior to being acquired by A Ltd. In preparing the consolidated financial statements of A Ltd’s group, the goodwill recorded by B Ltd must:

a.not recognised in the business combination

b.be recognised only if it’s non-purchased goodwill

c. be recognised at cost on acquisition

d. be recognised at carrying amount on acquisition

Answer 1

At the time of Acquisition of Company, Goodwill is recognized as a difference between Cost of Acquisition and Net Assets. Where Goodwill already recorded in the books is not considered while computing Net Assets value.

For eg. A Ltd acquired all issued shares of B Ltd for $100,000. B Ltd recorded goodwill in it's books prior to being acquired at $5,000 and Net Assets of B Ltd is $95,000 (including goodwill).

So at the time of acquisition, A Ltd will record Goodwill of $10,000 computed as under-

=Cost of Acquisition - Net Assets

Where Net Assets of B Ltd = $90,000

Goodwill = $100,000 - $90,000 = $10,000

Accordingly, answer to above question is (a) not recognised in the business combination.