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

Nature of Goodwill:

• Goodwill is an intangible asset that arises when a buyer acquires an existing business.
• Goodwill arising in case of an acquisition of a business is the excess of the consideration paid over the fair value of the assets of the business acquired.

Accounting Treatment:

• Goodwill is recorded when the amount of consideration paid is in excess of the fair value of the assets acquired.
• Goodwill is shown on the asset side of the balance sheet under intangible assets.
• Goodwill should be tested for impairment annually
• For impairment testing, the assets carrying amount is compared with its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and its value in use.
• When the carrying amount is more than recoverable amount, impairment loss needs to be recognized.