Acquired Goodwill

Acquired Goodwill: Definition

Acquired Goodwill, also known as purchased goodwill, arises when a business acquires another entity, and the purchase cost exceeds the aggregate fair values of the identifiable assets and liabilities. This type of goodwill is recorded during an acquisition and can significantly affect the financial statements, influencing the company’s balance sheet and income statement.

Examples of Acquired Goodwill

Business Acquisition Example:
- Company A purchases Company B for $2 million. The fair value of Company B’s identifiable net assets (assets minus liabilities) is $1.5 million. The acquired goodwill would be $500,000 ($2 million - $1.5 million).
Brand Value Acquisition:
- A clothing company acquires another clothing brand for its market recognition and customer base. If the purchase price exceeds the fair value of the physical assets, the excess amount is recorded as acquired goodwill.

Frequently Asked Questions (FAQs)

Q1: What is the difference between acquired goodwill and inherent goodwill? A1: Acquired goodwill is recognized during acquisitions when the purchase price surpasses the fair value of identifiable assets and liabilities. Inherent goodwill, on the other hand, is internally generated and cannot be separately recorded in the financial statements.

Q2: How is acquired goodwill accounted for in financial statements? A2: Acquired goodwill is recorded as an intangible asset on the balance sheet and is subject to annual impairment tests rather than amortization.

Q3: Is acquired goodwill amortized? A3: No, under current accounting standards, acquired goodwill is not amortized but rather tested annually for impairment.

Q4: How is impairment of acquired goodwill determined? A4: Impairment is assessed by comparing the carrying value of the goodwill to its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.

Q5: What standards govern the accounting of acquired goodwill? A5: The relevant International Accounting Standards (IAS) include IAS 22 (now superseded for business combinations), IAS 36 (Impairment of Assets), and IAS 38 (Intangible Assets). Additionally, Section 19 of the Financial Reporting Standard (FRS) applicable in the UK and Republic of Ireland provides detailed guidance.

Fair Values: The estimated price at which an asset or liability could be traded in a current transaction between willing parties.
Identifiable Assets and Liabilities: Those assets and liabilities that can be specifically identified and measured in the acquisition process.
Inherent Goodwill: Goodwill that is internally generated and not recognized separately on financial statements.
Impairment: The reduction in the recoverable amount of an asset below its carrying value.
Intangible Assets: Non-physical assets that hold economic benefits, such as patents, trademarks, and goodwill.

Online References

Suggested Books for Further Studies

“Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- Comprehensive coverage of financial accounting standards and their practical application.
“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- In-depth discussion on a wide range of accounting topics, including business combinations and goodwill.
“International Financial Reporting” by Alan Melville
- Detailed exploration of IFRS standards relevant to the recognition and measurement of goodwill.

Accounting Basics: “Acquired Goodwill” Fundamentals Quiz

### Acquired goodwill arises when: - [ ] The fair value of identifiable assets exceeds the purchase price. - [x] The purchase price exceeds the fair value of identifiable assets. - [ ] A company generates internal goodwill. - [ ] There is a loss on acquisition. > **Explanation:** Acquired goodwill arises when the purchase price paid for an acquired entity exceeds the aggregate fair values of its identifiable assets and liabilities. ### How is acquired goodwill recorded on the financial statements? - [ ] As an expense in the income statement. - [ ] As a liability on the balance sheet. - [x] As an intangible asset on the balance sheet. - [ ] As a reserve in the equity section. > **Explanation:** Acquired goodwill is recorded as an intangible asset on the balance sheet. ### How often should acquired goodwill be tested for impairment? - [ ] Monthly - [ ] Quarterly - [ ] Biannually - [x] Annually > **Explanation:** Acquired goodwill should be tested for impairment at least annually. ### What is inherent goodwill? - [ ] Goodwill arising from the acquisition of another company. - [ ] Goodwill measured as per purchase cost. - [x] Internally generated goodwill within a company. - [ ] Goodwill recognized by IAS 38. > **Explanation:** Inherent goodwill is internally generated within a company and cannot be separately recognized in the financial statements. ### Under which standard is the impairment of acquired goodwill primarily governed? - [ ] IAS 22 - [ ] IAS 38 - [x] IAS 36 - [ ] FRS 102 Section 19 > **Explanation:** The impairment of acquired goodwill is governed primarily by IAS 36. ### What happens if the carrying amount of goodwill exceeds its recoverable amount? - [ ] No action is taken. - [x] An impairment loss is recognized. - [ ] Goodwill is amortized. - [ ] Goodwill is revalued. > **Explanation:** If the carrying amount of goodwill exceeds its recoverable amount, an impairment loss is recognized. ### Can acquired goodwill be amortized under current standards? - [x] No, it must be tested for impairment. - [ ] Yes, it is amortized annually. - [ ] It is amortized over its useful life. - [ ] It is amortized only if explicitly required by the management. > **Explanation:** Acquired goodwill cannot be amortized but rather must be tested for impairment annually. ### Which IFRS provides specific guidance on intangible assets including acquired goodwill? - [ ] IAS 22 - [ ] IAS 32 - [ ] IAS 16 - [x] IAS 38 > **Explanation:** IAS 38 provides specific guidance on the recognition and measurement of intangible assets, including acquired goodwill. ### What basis is used to measure identifiable assets and liabilities at acquisition? - [ ] Historical Cost - [ ] Book Value - [ ] Nominal Value - [x] Fair Value > **Explanation:** Identifiable assets and liabilities are measured at their fair values at the acquisition date. ### If the purchase cost of an acquired entity is less than the fair value of its identifiable assets, what is this known as? - [ ] Positive Goodwill - [x] Bargain Purchase - [ ] Negative Goodwill - [ ] Inherent Goodwill > **Explanation:** If the purchase cost is less than the fair value of its identifiable assets, it is known as a bargain purchase.

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