Goodwill Calculation – Pooling of interest or purchased goodwill – IndAS 103 – DipIFR
WHAT IS GOODWILL?
Goodwill is the reputation earned by the business by providing good or high-quality goods or services and can be measured in monetary terms if an entity is willing to purchase another entity and agree to pay over and above the net assets acquired.
Goodwill gets recognized for the first time in books of purchasing entity.
Internally generated goodwill has no value since there is no basis of recognition.
Purchased goodwill gets recognition since it is measured in a business combination.
GOODWILL CALCULATION METHOD
Purchased goodwill is applicable under IndAS 103 business combinations, wherein all the assets & liabilities of the subsidiary are measured at fair value on the date of acquisition, with close identification of assets being recognized for the first time on the valuation of net assets.
Deferred taxes are calculated on the increase/decrease in the valuation of net assets.
The goodwill calculated is not amortized and tested for impairment annually, regardless of indicators of impairment.
The pooling of interest method is allowed only in case of common control transactions, where there is no transfer of control, comparing the purchase consideration with book values of assets/liabilities to calculate goodwill.
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When goodwill gets recognized?
The excess of purchase consideration over the fair value of the net assets of the subsidiary is recognized as goodwill. For example,
Help humans acquired 75000 shares of IndAS rocks Co. by paying cash of Rs. 20,000. They exchanged 1 share for every 3 shares acquired in IndAS rocks Co. The fair value of Helphumans.org share was Rs. 3 per share.
Cost of consideration
Share exchange 1/3*75000*3 75,000
The fair value of Net assets acquired 90,000
What if purchase consideration is less than the fair value of net assets acquired?
It is considered a bargain purchase and directly credited to capital reserve.
Ind AS 103 requires bargain purchase gain arising on business combination to be recognised in other comprehensive income and accumulated in equity as capital reserve.
How is goodwill & non-controlling interest linked for valuation purposes?
The valuation of Non-controlling interest determines the valuation of goodwill.
The entity has a choice to value Non-controlling interest
a) On a proportionate basis
b) Fair value basis
If Non-controlling interest valued on a proportionate basis, the goodwill calculated is Partial goodwill, only belonging to the parent.
If Non-controlling interest is valued on a fair value basis, the goodwill calculated is Full goodwill, belonging to Parent plus Non-Controlling interest (NCI).
How does the valuation of NCI have an impact on the treatment of impairment?
If the Non-Controlling Interest (NCI) is valued on a proportionate basis, and there is impairment of goodwill, the impairment loss is charged only to Group retained earnings.
For example, goodwill impaired by 5000
Group retained earnings Dr 5000
Goodwill Cr 5000
If the NCI is valued on fair value basis, and there is impairment of goodwill, the impairment loss is charged to Group retained earnings as well as Non-controlling interest.
For example, goodwill impaired by 5000 and NCI has a share of 20%
Group retained earnings Dr 4000
Non-controlling interest Dr 1000
Goodwill Cr 5000
There is no impact on re-statement of goodwill, but it does differ when charging impairment loss to Group retained earnings only or it is also charged to Non-controlling interest if NCI valued on a fair value basis.
Click and learn another topic through video Revaluation Model Vs Fair Value Model
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Tag – Goodwill Calculation / Pooling of Interest Method / IndAS 103 / Non-Controlling Interest / What is Goodwill