CIRD30535 - Intangible assets: notes on accounting practice: definition and when to capitalise: goodwill

Definition

Goodwill is the difference between the consideration payable for a business and the aggregate fair value of its identifiable assets less liabilities. Much time could be spent in worrying about this definition, but the essential point is that the goodwill is the residue of the surplus value of the business after identifying specific assets to which a fair value can be attributed. From CIRD30530 it will be seen that intangible assets can only be capitalised separately from goodwill when there is an initial measurable value to them that can be recognised.

FRS10 does not attempt to define goodwill in the abstract, but it states that internally developed goodwill should not be capitalised.

Purchased goodwill is defined as ‘the difference between the cost of an acquired entity and the aggregate of the fair value of that entity’s identifiable assets and liabilities’.

Negative Goodwill

It should be noted that in certain circumstances goodwill could be negative. The purchase price of a business may be less than the net value of its identifiable assets. Negative goodwill is generally attributed to two possible causes. The first is where a genuine bargain has been obtained, for example as a result of a distress sale. The other is where the purchase price is reduced to take account of future costs or losses that are not yet sufficiently certain to be recognised as liabilities at the date of acquisition.

Negative goodwill up to the fair value of the non-monetary assets acquired should be recognised in the Profit and Loss account over the same period over which the value of the non-monetary assets is “recovered” by sale or by depreciation. Any negative goodwill in excess of the fair values of the non-monetary assets acquired (which is not very likely) should be recognised in the profit and loss account in the periods expected to be benefited.

The treatment of negative goodwill involves a number of difficult problems for accountants. In practice, if this seems relevant to a tax computation, it is advisable to seek the advice of a Revenue accountant.

If there is negative goodwill it should be shown separately on the balance sheet. However, purchased goodwill arising from a single transaction should not be sub-divided into positive and negative components, but instead should be shown as one item.