Goodwill impairment

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sowrudy
Posts: 69
Joined: 22 Feb 2022, 03:26

Goodwill impairment

Post by sowrudy »

Hi All

At the moment I am learning about IAS 36. And when it comes to goodwill impairment, I understand that the goodwill only arises from the consolidated level/report. so when we determine that there is an impairment that leads to the removal of goodwill, I believe this also happens from the consol level. In other words, there wouldn't be any journal entry to offset the goodwill, am I right?. Because there is no accounting journal to the accounting system to debit Goodwill in the first place.
DJP
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Posts: 345
Joined: 26 Jun 2020, 15:57

Re: Goodwill impairment

Post by DJP »

Hello,

I think first you need to understand what Goodwill is. When a company acquires a business and is deemed to have control over that business, it will need to consolidate the financial statements of both companies. At the time of acquisition, you need to identify and recognise all the assets and liabilities of the acquired business at fair value. Usually, the consideration you pay for the acquired business will be higher than the fair value of the net assets of that business -- this difference is Goodwill. As an example, imagine that you pay 100 for the business you are acquiring but the fair value of the net assets of that business is only 80 (assets FV = 150; liabilities FV = 70). At the acquisition date your journal entries will be:

DR Assets 150
CR Liabilities 70
DR Goodwill 20 (this is the difference between what you are paying and the FV of the net assets you are getting)
CR Cash 100

Basically, Goodwill represents things like synergies, human capital, etc... that you are willing to pay for.

Going forward, you will have to test Goodwill for impairment. As time goes by, it is likely that those synergies you were once willing to pay for will not be as valuable, and Goodwill will be written down via impairment charges.

Consolidation is a bit more complex than my example above, but I hope it makes more sense now.
sowrudy
Posts: 69
Joined: 22 Feb 2022, 03:26

Re: Goodwill impairment

Post by sowrudy »

Hi Djp

Thanks for your reply, as per above example you gave, then there would be 2 sets of entry.

You mentioned the entry from parent is
DR Assets 150
CR Liabilities 70
DR Goodwill 20
CR Cash 100

How about the entry from subs? I would presume it will be below, correct?
Dr Cash 100
Cr investment from parent (equity account) 100

If parent records 80, while sub records 100, then how the intercompany eliminate Because there will be 20 variance
DJP
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Posts: 345
Joined: 26 Jun 2020, 15:57

Re: Goodwill impairment

Post by DJP »

The cash will go to the shareholder(s) of the acquired business, not to the business itself. Normally, there will be no equity adjustments in the accounts of the acquiree (just a change of ownership).
sowrudy
Posts: 69
Joined: 22 Feb 2022, 03:26

Re: Goodwill impairment

Post by sowrudy »

Hi DJP

What if in the scenario if the sub still continues operating , if I were the accountant of the Sub, and when I see that 100 in my company bank, what entry do I book?
DR cash 100
CR investment capita from parent 100

Is that not?
DJP
Trusted Expert
Posts: 345
Joined: 26 Jun 2020, 15:57

Re: Goodwill impairment

Post by DJP »

:)

Hopefully the sub will really continue operating, otherwise that GW would be immediately impaired, hehehhe

I think you are a bit confused about where the money goes to. Say that Company A buys Company B. Let's assume that Company B is a private company and held by one single shareholder (Mr Rich). When Company A buys Company B, Mr Rich will get 100 in exchange for his shares in Company B. It's Mr Rich that gets the cash, not Company B. So the accountant of Company B does not have to do anything (apart from praying for not being made redundant post-acquisition).
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