GOODWILL
Get the details right
Steve Collings examines the thorny issue of goodwill and how it must be reviewed to identify if there are indicators of impairment. Steve Collings Partner, Leavitt Walmsley Associates Ltd
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RS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland deals with the issue of goodwill in Section 19 Business Combinations and Goodwill. Goodwill has always been a somewhat “thorny” issue due mostly to its subjective nature. Debates on the topic have never really met with consensus; for example, under UK GAAP, goodwill must be amortised, whereas under IFRS it is tested for impairment at each reporting date instead. Goodwill is defined in the Glossary to FRS 102 as: “Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.” Goodwill usually arises in a business combination; i.e. when a parent entity acquires a subsidiary. At the date of acquisition, a fair value exercise of the subsidiary’s net assets is carried out and is compared to the purchase consideration, with the resulting excess being treated as goodwill (or negative goodwill as the case may be in a bargain purchase). Internally generated goodwill can never be recognised on the balance sheet, and this
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is clearly set out in FRS 102 para 18.8C(f). In addition, The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) Sch 1 Note 3 only permits goodwill to be recognised when it has been acquired for valuable consideration. (See Note 2 in The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) Sch 1.)
Positive goodwill
Positive goodwill arises when the cost of a business combination exceeds the net assets acquired. FRS 102 para 19.22 states: “The acquirer shall, at the acquisition date: a. recognise goodwill acquired in a business combination as an asset; and b. initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities recognised and measured in accordance with paragraphs 19.15 to 19.15C.” After initial recognition at cost, goodwill must then be subsequently amortised on a systematic basis over its useful life. There is no option under UK GAAP to assign an indefinite useful life to goodwill. This is notably different than under IFRS 3 Business Combinations, which does not permit goodwill amortisation; instead entities preparing financial statements under IFRS are required
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