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
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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).
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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 A5: The relevant International Accounting Standards (IAS) include IAS 22 (now superseded for business combinations), IAS 36 (Impairment of Assets), and IAS 38 (Intangible Assets).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.
Related Terms with Definitions
- 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
- IAS 36 - Impairment of Assets
- IAS 38 - Intangible Assets
- Financial Reporting Standard 102 - Section 19
Suggested Books for Further Studies
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“Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- Comprehensive coverage of financial accounting standards and their practical application.
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“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.
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“International Financial Reporting” by Alan Melville
- Detailed exploration of IFRS standards relevant to the recognition and measurement of goodwill.
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