Goodwill is the reputation earned by the business by providing high-quality goods or services. It can be measured in monetary terms if an entity is willing to purchase another entity and agree to pay over and above the net assets acquired.
Goodwill got recognized for the first time in books of purchasing entity.
Internally generated goodwill has no value since there is no basis of recognition.
However, purchased goodwill gets recognition since it is measured in a business environment.
GOODWILL CALCULATION METHOD
Purchased goodwill is applicable under IndAS 103 business combinations, wherein all the assets & liabilities of the subsidiary are measured at fair value on the date of acquisition, with close identification of assets being recognized for the first time on the valuation of net assets.
Deferred taxes are calculated on the increase/decrease in the valuation of net assets.
The goodwill calculated is not amortized and tested for impairment annually, regardless of indicators of impairment.
The pooling of interest method is allowed only in case of common control transactions, where there is no transfer of control and comparing the purchase consideration with book values of assets/liabilities to calculate goodwill.
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When goodwill gets recognized?
The excess of purchase consideration over the fair value of the net assets of the subsidiary is recognized as goodwill. For example,
Help humans acquired 75000 shares of IndAS rocks Co. by paying cash of Rs. 20,000. They exchanged 1 share for every 3 shares acquired in IndAS rocks Co. The fair value of Helphumans.org share was Rs. 3 per share.
Cost of consideration
Cash 20,000
Share exchange 1/3*75000*3 75,000
The fair value of Net assets acquired 90,000
Goodwill 5,000
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Ind AS 38 — Research and Development — INTANGIBLE ASSETS
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