Question

Q4. (25 marks) Refer to the specific class example and explain the process of Goodwill estimation step by step? What are the differences between IFRS and ASPE Accounting accordingly?

Answer 1

Estimation of goodwill:-

1 Book Value of Assets

First, get the book value of all assets on the target’s balance sheet. This includes current assets, non-current assets, fixed assets, and intangible assets. You can get these figures from the company’s most recent set of financial statements.

#2 Fair Value of Assets

Next, have an accountant determine the fair value of the assets. This process is somewhat subjective, but an accounting firm will be able to perform the necessary analysis to justify a fair current market value of each asset.

#3 Adjustments

Calculate the adjustments by simply taking the difference between the fair value and the book value of each asset.

#4 Excess Purchase Price

Next, calculate the Excess Purchase Price by taking the difference between the actual purchase price paid to acquire the target company and the Net Book Value of the company’s assets (assets minus liabilities).

#5 Calculate Goodwill

With all of the above figures calculated, the last step is to take the Excess Purchase Price and deduct the Fair Value Adjustments. The resulting figure is the Goodwill that will go on the acquirer’s balance sheet when the deal closes.

The DIFFERENCE BETWEEN IFRS AND ASPE:-

IFRS requires an impairment test for goodwill on an annual basis. ASPE requires an intangible asset with an indefinite life to be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may exceed its fair value.