Question

Alloy Ltd has acquired a Blink manufacturing division from LGIA Ltd. The accountant, Mr Lee, has shown the board of directors of Alloy Ltd the financial information regarding the acquisition. Mr Lee calculated a residual amount of $45 000 to be reported as goodwill in the accounts. The directors are not sure whether they want to record goodwill on Alloy Ltd’s statement of financial position. Some directors are not sure what goodwill is or why the company has bought it. Other directors even query whether goodwill is an asset, with some being concerned with future effects on the statement of profit or loss and other comprehensive income.

Required Advise Mr Lee about the nature of goodwill and how to account for it.

Answer 1

Internally generated goodwill shall not be recorded in the books of account. However, purchased goodwill may be recorded in the books of account.

In the give case, Alloy Ltd has acquired Blink manufacturing division from LGIA Ltd, where in the course of acquisition goodwill was also acquired. So, it is clearly in the nature of purchased goodwill.

Such purchased goodwill may be written of in the statement of profit or loss within 5 years or any other suitable no. of years exceeding 5 years explaining the reason in the notes of accounts.

Hence, the goodwill shall be recorded as an asset and amortized in statement of profit or loss over next 5 years equally.