Accounting for Goodwill
Goodwill on your company’s balance sheet is the value that your company gained after acquiring another. If the acquiring business pays for the target company amount which is more than the target’s book value, the excess amount accounts for the business’s goodwill. If the acquiring business pays less than the target’s book value, then, it gets a negative goodwill.
The value of your business’s brand name, good customer relations, solid client base, patents, proprietary technology, and good employee relations represent goodwill. Note that goodwill is an intangible asset because it’s not something you can touch like buildings and other plant and equipment. In your business balance sheet, you should list the goodwill account in the fixed assets section.
It’s difficult to determine the exact value of a business’s goodwill. However, it makes a business more valuable. For example, a company that has been in operation for many decades and has been offering high-quality products to its clients has a higher goodwill than a small company that has featured several fraud cases and offers low-quality stuff.
Since the components of goodwill have subjective values, there is a big risk that a company could overestimate good will in acquisition. This over-estimation will be bad news to any each shareholder of the acquiring business. This is because their share value will drop when the company will be writing off the goodwill.
Calculation of Goodwill
Goodwill is equivalent to the price paid for the company that has been acquired minus the fair market value net assets. To get the value of the net identifiable assets, subtract the value of the acquired business’s liabilities (as recorded in its balance sheet using double entry accounting) for the its total value of its identifiable assets. Examples of identifiable assets include inventory and any other business assets.
If you have to consider any other asset that isn’t recorded in the business’s balance sheet, then, it must originate from contractual right or you can sell it separately from the business. Examples of such assets include patents or contracts.
The SFRS 38 requires company owners to recognize positive, purchased goodwill as an asset in the balance sheet. In case of your business getting a negative goodwill after during acquisition, the SFRS 38 requires that the acquired assets be tested for impairment (Also see What Is Impairment Of Fixed Assets?) and the value of liabilities be inspected for completeness.
If the goodwill is still negative, then this value should be recognized and separately disclosed on the face of the balance sheet under the goodwill heading. You should also add notes that reveal the net amount of negative goodwill and positive goodwill.
The estimation of goodwill is a complicated process. If you haven’t sure of how it should be done, it’s advisable to use an accounting service in Singapore.