Goodwill Impairment

BenEadir

Hi all,

If company A buys company B for €1m made up of €700,000 in net tangible assets (stock + debtors + fixed assets - trade creditors etc) and €300,000 in Goodwill how is the Goodwill accounted for? Is it simply shown on the BS as an intangible asset and (more importantly) how is it's value tested to ensure the value on the BS reflects it's current market value?

I understand that in the past the €300,000 in Goodwill would typically have been amortised over a 10 year period but that now, under some new guidelines, the value of carried Goodwill must be tested for impairment and that that process involves having the Goodwill independently valued with any gain or loss being deducted or added to the carried value.

Do I have the basic understanding right and if so how do companies undertake a valuation of the carried Goodwill? Do they get another firm, other than their own external auditor, to undertake an independent goodwill valuation?

I'd appreciate any steer I can get on this.

Ben

masoodsarwar

BenThere wrote: »

Hi all,

If company A buys company B for €1m made up of €700,000 in net tangible assets (stock + debtors + fixed assets - trade creditors etc) and €300,000 in Goodwill how is the Goodwill accounted for? Is it simply shown on the BS as an intangible asset and (more importantly) how is it's value tested to ensure the value on the BS reflects it's current market value?

I understand that in the past the €300,000 in Goodwill would typically have been amortised over a 10 year period but that now, under some new guidelines, the value of carried Goodwill must be tested for impairment and that that process involves having the Goodwill independently valued with any gain or loss being deducted or added to the carried value.

Do I have the basic understanding right and if so how do companies undertake a valuation of the carried Goodwill? Do they get another firm, other than their own external auditor, to undertake an independent goodwill valuation?

I'd appreciate any steer I can get on this.

Ben

I assume that this take over is 100%. so under full or partial goodwill method it will give the same value.

You recognize goodwill after u acquire the company. as obviously if u have paid the company more than its Net asset worth, the difference is its goodwill.

Its is recognized as a separate Intangible asset and tested for impairment annually. right.

There are internal and external indicators of impairment.

External: rapid decline in Share price, Loss of key customers, recurring losses. decline in demand, falling profits

Internal: Employee turnover, Obsolescence of assets/brand.

Alan Shore

Does Company B still exist as a subsidiary or was the business bought from Company B. In one you have assets under investments and the other you have assets in Company A's Balance under the headings including goodwill.

If they bought the company in 2004 - 2008 there is more than likely an impairment, 2008 onward not so much. What was the goodwill for a brand, earning potential that has reduced substantially, property that adjoined the purchasers that they wanted and paid over the odds for.

If you were buying the business today take the assets in the balance sheet and the sustainable profit x 3 or 4 and see would you pay an extra €300k for the company.

BenEadir

Thanks guys,

In the example I gave the company was indeed acquired 100% and it was an asset purchase not a share purchase.

Company B was immediately integrated into Company A and isn't accounted for internally as a separate profit centre in any any. In this case does the goodwill value stated on the BS need to be reviewed annually? Can the review be undertaken by the auditor or does the review have to be undertaken by an independent 3rd party of some sort? Can the review take the form of an opinion from management whereby they confirm that in their opinion the present market value of the acquired goodwill is €x?

Ben