Why goodwill is calculated at the date of acquisition

Welcome My account Logout. Search site. Toggle navigation. Navigation Standards. Navigation International Financial Reporting Standards. Quick Article Links. Key definitions [IFRS 3, Appendix A] business combination A transaction or other event in which an acquirer obtains control of one or more businesses.

This guidance includes: Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments or any combination thereof , or by not issuing consideration at all i. B5] Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity [IFRS 3.

B6] The business combination must involve the acquisition of a business, which generally has three elements: [IFRS 3. B7] Inputs — an economic resource e. Method of accounting for business combinations Acquisition method The acquisition method called the 'purchase method' in the version of IFRS 3 is used for all business combinations. B14] The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the entity also considers other pertinent facts and circumstances including: [IFRS 3.

B15] relative voting rights in the combined entity after the business combination the existence of any large minority interest if no other owner or group of owners has a significant voting interest the composition of the governing body and senior management of the combined entity the terms on which equity interests are exchanged The acquirer is usually the entity with the largest relative size assets, revenues or profit [IFRS 3.

B16] For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of the combining entities. B17] Acquisition date An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.

Considerations might include, among others, the date a public offer becomes unconditional with a controlling interest acquired , when the acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or the date competition or other authorities provide necessarily clearances.

Acquired assets and liabilities IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination: Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. Goodwill Goodwill is measured as the difference between: the aggregate of i the value of the consideration transferred generally at fair value , ii the amount of any non-controlling interest NCI, see below , and iii in a business combination achieved in stages see below , the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree, and the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with IFRS 3.

Business combination achieved in stages step acquisitions Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in accordance with the nature of the investment by applying the relevant standard, e. Measurement period If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the business combination is accounted for using provisional amounts.

B50] Contingent consideration Contingent consideration must be measured at fair value at the time of the business combination and is taken into account in the determination of goodwill. B] However, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals.

B55] Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must be apportioned between pre-combination and post-combination service and accounted for accordingly. BB62B] Indemnification assets Indemnification assets recognised at the acquisition date under the exceptions to the general recognition and measurement principles noted above are subsequently measured on the same basis of the indemnified liability or asset, subject to contractual impacts and collectibility.

B19] identifying intangible assets acquired [IFRS 3. B] Disclosure Disclosure of information about current business combinations An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authorised for issue.

B67] details when the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or items of consideration and the amounts recognised in the financial statements for the business combination thus have been determined only provisionally follow-up information on contingent consideration follow-up information about contingent liabilities recognised in a business combination a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various details shown separately the amount and an explanation of any gain or loss recognised in the current reporting period that both: relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period, and is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements.

Deloitte comment letter on discussion paper on goodwill 21 Dec Related Interpretations. Related Projects. See Legal for more information. DTTL also referred to as "Deloitte Global" and each of its member firms are legally separate and independent entities. You may learn more about Financial Analysis from the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Accounting Course. Login details for this Free course will be emailed to you.

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Search for software and business topics:. Advertiser Disclosure. Goodwill Accounting: What It Is and How to Calculate It Goodwill accounting is the process of valuing and recording intangibles such as company reputation, customer base, and brand identity.

Mary Girsch-Bock Accounting Specialist. Overview: What is goodwill accounting? A variety of asset types can be considered goodwill, including the following intangible assets: Business brand Business reputation Licensing and permits Copyrights Patents Domain names Talent Goodwill accounting is most frequently used in the business valuation process when acquiring another business.

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