Goodwill help needed

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi,

I'm really confused about goodwill. I understand the principle but I cannot find any help with calculating goodwill. I cannot find the workings for goodwill for the workbook questions for Osborne. Is there any good material for goodwill or does anyone have any good notes on calculating goodwill? Any help apreciated as I'm confused and down about it. :cry:

S

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Hi Sonia.

    Goodwill is the difference between what you have paid and the fair value.

    i.e. If you purchase a company for £1,500 which has a value of £1,000 - the goodwill is £500.

    This goodwill should be capitalised on the balance sheet as an intangible fixed asset, and amortised.

    Scott.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed
    Scotty wrote:
    Hi Sonia.

    Goodwill is the difference between what you have paid and the fair value.

    i.e. If you purchase a company for £1,500 which has a value of £1,000 - the goodwill is £500.

    This goodwill should be capitalised on the balance sheet as an intangible fixed asset, and amortised.

    Scott.

    Isn't that under the old standards? I didn't think goodwill should be shown in the accounts anymore.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Thanks. I need some examples of questions and answers. Know any good websites on it?

    S
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Im pretty sure that it would still be shown on the face of the accounts. It wouldnt just be left off!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Not sure if it mentions goodwill, but www.bized.ac.uk
    is a good resource.

    Scott.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    I had a look last night in my pocket notes (which I don't have here). IIRC, it says you don't show internally generated goodwill in the accounts, but if it is purchased with the entity, it is shown on the balance sheet but NOT amortised.
    If I remember tonight, I will type here exactly what it says.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Right, in the pocket book it says:
    If a business has goodwill it means that the value of the business as a going concern is greater than the value of its separate tangible assets.
    Internally generated goodwill is never shown as an asset in the balance sheet.
    Goodwill is shown in the balance sheet when an entity is purchased.

    Goodwill working
    Cost of investment x
    Share of net assets acquired as represented by:
    Ordinary share capital x
    Share premium x
    Retained earnings on acquisition x
    Group share % (x)
    Goodwill x

    The xs should be 1st one on the right, next 3 on the left, last 2 on the right (but I can't do that on this forum!).

    Goodwill is not amortised. It remains in the balance sheet subject to an annual impairment review. The amount of impairment will be given to you in the exam.

    I really hope this has helped and not confused people any further, LOL!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Purplegirl you are quite right in that internal goodwill isn't shown on the balance sheet. This would be the basic build up of a new business generating goodwill on a day to day basis.

    Purchased goodwill however is show on the balance sheet (as you have said) but unless the goodwill has an infinite life it should be amortised over a usual period of 20 years.

    Quote from the ASB in relation to FRS10
    Goodwill and Intangible Assets

    FRS 10 Issued: December 1997

    The objective of FRS 10 is to ensure that purchased goodwill and intangible assets are charged to the profit and loss account (income statement) in the periods in which they are depleted.

    The standard takes the view that goodwill arising on an acquisition (ie, the cost of acquisition less the aggregate of the fair value of the purchased entity's identifiable assets and liabilities) is neither an asset like other assets nor an immediate loss in value. Rather, it forms a bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabilities in the consolidated financial statements. Although purchased goodwill is not in itself an asset, its inclusion amongst the assets of the reporting entity, rather than as a deduction from shareholders' equity, recognises that goodwill is part of a larger asset, the investment, for which management remains accountable.

    An intangible item may meet the definition of an asset when access to the future economic benefits that it represents is controlled by the reporting entity, whether through custody or legal protection. However, intangible assets fall into a spectrum ranging from those that can readily be identified and measured separately from goodwill to those that are essentially very similar to goodwill. The basic principles set out in the standard for accounting for intangible assets that are similar in nature to goodwill are therefore closely aligned with those set out for goodwill.

    The standard requires purchased goodwill and certain intangible assets to be capitalised and, in most circumstances, to be amortised systematically through the profit and loss account (usually over 20 years or less). Impairment reviews must be undertaken, particularly if the goodwill or intangible asset is regarded as having an infinite life and is therefore not being amortised. Internally generated goodwill should not be capitalised and internally developed intangible assets should be capitalised only where they have a readily ascertainable market value.

    FRS 10 is effective for accounting periods ending on or after 23 December 1998.

    Regards

    Dean
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed

    Yes Dean is right for UK standards but Purplegirl is correct for international standards which is covered for technician (I think) :?
    No amortisation of goodwill. IFRS 3 prohibits the amortisation of goodwill. Instead goodwill must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets

    Annette
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed
    Dean wrote:
    Purplegirl you are quite right in that internal goodwill isn't shown on the balance sheet. This would be the basic build up of a new business generating goodwill on a day to day basis.

    Purchased goodwill however is show on the balance sheet (as you have said) but unless the goodwill has an infinite life it should be amortised over a usual period of 20 years.

    Quote from the ASB in relation to FRS10
    Goodwill and Intangible Assets

    FRS 10 Issued: December 1997


    FRS 10 is effective for accounting periods ending on or after 23 December 1998.

    Regards

    Dean

    Hi Dean, unfortunately all standards are now under the IAS as of this year. Therefore any exam questions will have to be answered using them, and anything from as far back as you have posted is now no longer of any use.
    This is why I have typed what it says in the pocket notes.
    Thanks for the input, though!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Goodwill help needed
    purplegirl wrote:

    from as far back as you have posted is now no longer of any use.

    I think you will find it is of use, maybe not examinable by the AAT anymore though.

    Regards

    Dean

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