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Treatment of negative goodwill under FRS 102

Treatment of negative goodwill under FRS 102

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Hello

The client has acquired 100% share capital of two companies as a bargain purchase and has ended up with a negative goodwill. I understand negative goodwill up to the fair value of non-monetary assets is recognised in profit or loss as those assets are recovered. However these assets include investment properties that are not depreciated and are maintained at fair value. I wanted some clarity as to how this negative goodwill should be treated in practice due to presence of investment properties.

If the investment properties are worth £800k and fair value of other non-monetary depreciable assets is £200k, do we need to apportion total negative goodwill of £700k and only release £140k to P&L and the rest will remain on balance sheet? 

Any help will be appreciated.

 

Replies (5)

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By thevaliant
25th May 2021 13:40

I suspect so.
Don't forget, non-monetary assets include stock and debtors, and that will release 'immediately' (or at least I believe so).

If investment properties aren't depreciated then they'll never release to the P&L except on a sale, so the negative goodwill will only release on a sale.

I admit its a bit strange.

You could do what another audit manager did. I had the client, worked it all out properly and started 'amortising' over 50 years. Three years later another manager took over, took one look at the negative goodwill and wrote it straight off to P&L without asking anyone.

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By paul.benny
25th May 2021 13:47

The amounts you mention suggest a very large discount to the book value of the assets in the acquired company, which in turn suggests that they should be fair valued downwards.

Or are there some liabilities that were not recognised in the books of the acquired company?

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Replying to paul.benny:
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By kashpat
25th May 2021 14:35

The seller had personal circumstances where he wanted to sell the business as soon as possible and our client acquired this at a large discount. The largest item on balance sheet of the acquired entities were investment properties which were valued before disposal by the seller. The net balance sheet value was also worth more than what our client has paid but the difference is not as significant as whilst comparing to fair value of non-monetary assets.

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By paul.benny
25th May 2021 15:45

TBH, the story you're been told sounds more than a bit fishy.

The seller has revalued his investment properties producing a big uplift. But he also has an urgent need to sell his company. Buyer thinks he's got a bargain.

Were valuations professional or done by seller? Did buyer do his own DD on the valuations (or for that matter, verify that title is owned by company)

Returning to the specific question, it doesn't really matter what value the seller attributes to the properties - it's down to the acquirer to fair value them. Even without getting professional valuations, you/client can look at comparable properties, compare rental yields, rent per sqft if commercial and form your own view of the fair value.

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By kashpat
25th May 2021 16:14

I agree there appears to be something more to it than what we have been told by the client but this is the version the client maintains. If there was more to it we are not likely to know.

With valuation of investment properties, the client has obtained bank loans secured against these properties post acquisition and bank's valuation is not materially different.

Given what we have as a negative goodwill would you agree the element related to investment properties will remain on balance sheet with stocks/accounts receivable element taken to P&L immediately and goodwill associated to depreciable assets on the basis of depreciation policy?

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