ACCA SBR ^INT Syllabus D. Financial Statements of Groups entities - Simple Goodwill - Notes ^{6 / 37}

Goodwill

1. When a company buys another - it buys more than their ‘net assets’ on the SFP. 

   Customer base, reputation, workforce etc. are all part of the value of the company (and not on the SFP)

   This is “Goodwill”

2. Goodwill only occurs on a business combination. Individual companies cannot show their individual goodwill on their SFPs.

   This is because they cannot get a reliable measure, This is because nobody has purchased the company to value the goodwill appropriately.
    
   On a business combination the acquirer (Parent) purchases the subsidiary - normally at an amount higher than the FV of the net assets on the SFP, they buy it at a figure that effectively includes goodwill. 

   Therefore the goodwill can now be measured and so does show in the group accounts as an intangible asset.

How is Goodwill calculated?

On a basic level - I hope you can see - that it is the amount paid by the parent less the FV of the subs assets on their SFP.
 
Let me explain..

In this example S’s Net assets are 900 (same as their equity remember).

This is just the ‘book value’ of the net assets.

The Fair Value of the net assets may be, say, 1,000.

However a company may buy the company for 1.200. So, Goodwill would be 200.

The goodwill represents the reputation etc. of a company and can only be reliably measured when the company is bought out.

Here it was bought for 1,200. Therefore, as the FV of the net assets of S was only 1,000 - the extra 200 is deemed to be for goodwill.

The increase from book value 900 to FV 1,000 is what we call a Fair Value adjustment.

Bargain Purchase

This is where the parent and NCI paid less at acquisition than the FV of S’s net assets. This is obviously very rare and means a bargain was acquired

So rare in fact that the standard suggests you look closely again at your calculation of S’s net assets value because it is strange that you got such a bargain and perhaps your original calculations of their FV were wrong

However, if the calculations are all correct and you have indeed got a bargain then this is NOT shown on the SFP rather it is shown as:

• Income on the income statement in the year of acquisition