Question

We have reviewed the topic of Goodwill on the Balance Sheet which is created when a company acquires another and pays more than the market value of the acquired company's net assets.

What I want you to address in this discussion board are the following:

1. What type of "event" results in goodwill being recorded on a company's balance sheet?
2. How is goodwill evaluated to determine whether this specific asset is impaired? If it is deemed to be impaired, what actions does a company need to take?
3. How do you view goodwill on the balance sheet - specifically, if certain levels of it would cause concern, identify what level of goodwill would cause you concern and why?
4. If it would not concern you regardless of the amount of goodwill on the balance sheet, explain why.

Answer 1

1. type of events that results into goodwill :-

i) When We value acquired net asset of company above the book value or market value.

ii) When We value NCI at fair value not proportionate to net asset.

2. As per IAS 36 impairment of asset, when there is fall in value of asset due to drop in fair value of the asset than book value, asset will get impaired to its book value, but when the impairment of the asset or CGU occured ,the first charge of the impairment charged upto value of goodwill recorded previously, after that remaining impaiment charged to the respective assets in their book value ratio.

Because at the time of acquisition we estimated fair value of asset to be above market value, which created the goodwill in first place.

3 I see the goodwill on the balance sheet as synergies, which was estimated at the time of the aquisiton of the target company, which was estimated that if the both the bussiness get together it generate more value than both individuals may in terms of process,profit,revenue, competition etc.

It would not concern me because if we acquired the target company above market value it definately generates some good stuff equivalent or more than the amount of goodwill recorded, amount of goodwill represents target companies value in the eyes of the acquirer above market, that value get redemption by time.