Nature & Treatment of Goodwill arising on Business Combination

Question: Discuss the nature and treatment of goodwill or bargain purchase arising on a business combination. Answer: Nature Treatment of Goodwill arising on Business Combination: Goodwill is considered to be such intangible asset, that arises, when any business entity acquires another existing business. It is, generally, evaluated by differencing the net assets acquired and the net liabilities assumed. In IFRS 3, the process is described in advanced level to ascertain the goodwill more accurately (Liu Wang 2014). As per IFRS 3, the goodwill should be recognized by the following process:- Particulars Amount Amount Value of Consideration ***** Non-Controlling Interest ***** Business Combination Reserve arised from Acquisition ***** TOTAL ***** Less: Net Assets Recognised: Identifiable Assets in Fair Value ***** Less: Identifiable Liabilities in Fair Value ***** ***** GOODWILL ***** Generally, the net balance use to result in positive amount and therefore, the goodwill account uses show debit balance normally. If the net balance results in a negative balance, then it is considered as Bargain Purchase Gain, which uses to be adjusted with Profit Loss A/c. In such cases, the acquiring companies should re-examine the acquisition process and the accounting methods properly and also should revaluate the acquired assets liabilities again. As discussed above, any goodwill, realized in acquisition is treated as asset and, hence, the balance of goodwill is carried forward in the following accounting period and shown in the asset side of the Balance Sheet. Whereas, the realized Bargain Purchase Gain is treated as profit and, therefore, the balance on such gain is closed by adjusting it with the Profit Loss A/c. of the acquirer in the current accounting period (Bugeja Loyeung,2016). Different Methods of Business Combination: According to IFRS 3, the acquiring company should combine the acquired business with its own business by adopting any of the two following principles:- Recognition Principle: According to the guidelines of IFRS 3.10, if the acquirer is following the recognition principle, then the net amount of the assets, ascertained by subtracting the identifiable liabilities from the identifiable assets, and the non-controlling interest of the acquiree, should be recognised differently from Goodwill (Boyle et al., 2012). Measurement Principle: In IFRS 3.18, it is stated that according to measurement principle, the identifiable assets liabilities should be evaluated as per the fair value of the items (Shalev et al.,2015). Reference List: Boyle, D. M., Carpenter, B. W., Mahoney, D. (2012). Goodwill Accounting: A Closer Examination of the Matter of Nonimpairments.Management Accounting Quarterly,13(4) Bugeja, M., Loyeung, A. (2016). Accounting for business combinations and takeover premiums: Pre-and post-IFRS.Australian Journal of Management, 0312896215614630 Liu, L., Wang, X. (2014). The Value-relevance of Accounting Information for Business Combinations.à ­Ã¢â‚¬ ¢Ã…“à ¬Ã‚ ¤Ã¢â‚¬ËœÃƒ ªÃ‚ ²Ã‚ ½Ãƒ ¬Ã‚  Ã…“à «Ã‚ ¬Ã‚ ¸Ãƒ ­Ã¢â€ž ¢Ã¢â‚¬ Ãƒ ¬Ã¢â‚¬â€Ã‚ °Ãƒ ªÃ‚ µÃ‚ ¬,3, 253-269 Shalev, R., Bonacchi, M., Marra, A. (2015). Fair Value Accounting and Firm IndebtednessEvidence from Business Combinations Under Common Control.Available at SSRN 2587270.