Hi all, If company A acquired company B at a premium. Would that premium booked as goodwill in company A(acquiring company)'s balance sheet or company B(acquired company)'s balance sheet ? In what scenario would that goodwill booked under company B (acquired company)'s balance sheet? Any input appreciated. Thx in advance.
It should be in A’s when consolidated. As far as I’m aware there wouldn’t be any circumstances where the goodwill would be on your own books rather than the acquirers but happy to be corrected on this.
[Definition] In a purchase acquistion, the excess of the cost of acquisition over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired is defined as goodwill and is recognised as an asset. Goodwill is an example of an intangible asset ( one without physical sdubstance). Goodwill arises when one company purchases another for a price that exceeds the fair value of the assets acquired. Goodwill is recorded as an asset. [Example] 1.A purchases B for 400. 2.Fair Value of B’s identifiable assets is 300. 3.Excess of the purchase price is attributed to B’s well trained workforce,patents,etc. 4.A will record (a) Total assets = 400 consisting of 300 in identifiable assets. (b) Goodwill = 100 5.Under IFRS and GAAP, goodwill should be capitlised and tested for impairment annually. 6.Goodwill is not amortised 7.Impairment of goodwill is a noncash expense. 8.If goodwill is impaired: (a) it is charged against income in the current period. (b) this charde reduces current earnings © assets are also reduced. [Issues] 1.Management judgement can be particularly apparent in the allocation of the excess purchase price. 2.If remaining excess purchase price is allocated to goodwill,there will be no impact on the company’s NI. 3.If excess were to be allocated to fixed assets, depreciation would rise,hence reducing NI and producing incorrect financial statements 4.Goodwill can signficantly affect the comparability of financial statements between companies using different accounting methods. [Conclusion] An analyst should remove any distortion that the recognition,amortisation, and impairmentof goodwill might create by adjusting the company’s financial statements. Adjustments : 1.Computing ratios using balance sheet data that exclude goodwill. 2.reviewing operating trends using data that exclude amortisation/impairment charges.
Thanks all. A question, is removing goodwill a must for analytical purpose ? Some say it generate no value so remove it. But company paying premium because of strategy, well trained workforce…etc. It does have value. If we remove goodwill, why don’t we remove all intangible assets like patents, customer base …etc from asset ?? How does it affect comparability? If company A allocate excess purchase price to goodwill and we remove it , company B allocate excess purchase price to fixed assets and we don’t remove it. Won’t that be more unfair.
B_C, ask yourself what goodwill is, then you might be able to answer that question? Besides, majority of intangibles are amortized anyway.
a search in google gives: One argument for leaving Goodwill on the Balance Sheet rests on the presumption (sometimes not specified - Buffet) that the Balance Sheet should measure the market value of the business (in total). It then seems reasonable that a value derived from a market transaction should be left as is, to reflect a real value. But there are problems with that presumption. Companies that grow their business by sweat and tears will be expensing the costs of promotion, price discounting, etc ; all the expenses incurred to grow. None of those outlays will be stuck onto the Balance Sheet permanently as assets. Accounting should not create superficial end-runs around booking expenses for those companies who choose the easy way to grow. The sweat and tears company should not be penalized with a weaker Balance Sheet than the competitor with Goodwill. The Balance Sheet does not, and never has been, meant to measure the market value of the business. It measures assets and liabilities. Investors can chose to pay many multiples of that net value for the stock, but the reported assets of the business should not be increased as a result. The market value of a stock is just as valid a measure of a company’s worth as the price paid by the company for a part of it. But no one argues that every company trading at a multiple of book value should add Goodwill to their Balance Sheet.
So to conclude… We remove Goodwill because it is not amortized so it will be stuck onto B/S permanently as assets, unless impairment occurs. Correct?
^^ huh?
B_C Wrote: ------------------------------------------------------- > So to conclude… > > We remove Goodwill because it is not amortized so > it will be stuck onto B/S permanently as assets, > unless impairment occurs. Correct? Behold…Shakespeare walks among us 
Unilever Wrote: ------------------------------------------------------- > It should be in A’s when consolidated. As far as > I’m aware there wouldn’t be any circumstances > where the goodwill would be on your own books > rather than the acquirers but happy to be > corrected on this. in principle i think you’re right, but i’ve seen companies which go through an internal reorganization involving recapitalization, new corporate structure, and transfer of assets/liabilities around, that end up with goodwill on their books afterwards because some auditor determined that purchase price accounting applies. i guess the accounting definition of an ‘acquisition’ can sometimes be different than what one would think
B_C Wrote: ------------------------------------------------------- > > In what scenario would that goodwill booked under > company B (acquired company)'s balance sheet? > If Company B becomes a reporting unit of Company A, the goodwill would be pushed down to their books.