Before writing about the Key Components of Core Goodwill, we must say what the Goodwill is. Goodwill is an intangible asset linked with a business combination (IFRS 3). It is recorded when an entity acquires another entity and where the acquisition cost is greater than the fair value of the net identifiable assets acquired and liabilities assumed. It is reported on the balance sheet as a non-current asset. The amount of goodwill is subject to an impairment test at least once a year.
However, internally generated goodwill (as a result of delivering good customer service, unique management, teamwork, etc.) is not reported on the company’s balance sheet. Key Components of Core Goodwill is described in short below.
Goodwill = Consideration transferred + Amount of NCI (non-controlling interests) + Fair value of previous equity interests – Net assets recognized
Note: Since 2001, U.S. companies are no longer required to amortize the recorded amount of goodwill.
The KEY components of CORE goodwill:
There are six FASB goodwill components described in the later part of this article. Here we are describing the Core goodwill components. Core goodwill has two main components, such as-
(i) Going concern goodwill, and
(ii) Combination goodwill
Going concern goodwill relates to the net assets of the acquiree (entity which is going to be acquired by the purchaser), whereby the acquiree’s net assets together are worth more than the net assets separately. This is caused by the synergy* created by the acquiree’s net assets within the acquiree as a going concern.
Combination goodwill relates to the extra benefits accruing because of the synergy* created by the acquirer (the entity which is purchasing) and the acquiree combining together. For example, the resources available to the acquiree are of particular use to the acquirer. These benefits could affect the recorded earnings of the acquirer or the acquiree [or both] depending on the nature of the benefits.
*Synergy means substances which produce a combined effect greater than the sum of their separate effects. For example: 2+3=6
The six FASB goodwill components are:
• At the date of acquisition, the excess of the fair values over the book values of the acquiree’s net assets.
• The fair value of other net assets that the acquiree had not recognized in the past for some rational reasons.
• The fair value of the going-concern element of the acquiree’s existing business.
• The fair value of the expected synergies* (described above) and other benefits from combining the acquirer’s and the acquiree’s net assets and businesses.
• Overvaluation of the consideration (money or otherwise) paid by the acquirer because of errors in the valuation of the consideration given.
• Over-payment or underpayment by the acquirer.