I am struggling with an accounting concept and would be grateful for some guidance in respect of when Goodwill arises.
So I understand that Goodwill can arise as a result of the investment / consolidation process.
However, in a set of accounts I am reviewing a subsidiary has Goodwill on their balance sheet and the subsidary's accounts are not consolidated and nor have they invested/ bought shares in another company.
I do however believe that the subsidary did not start their business, but instead bought a care home business and that business then became the sole business of the subsidiary company.
If anyone could clarify when goodwill can appear (specifically outside of consolidated accounts) that would be great!
For further reference this company also has a parent company so I understand why goodwill would arise for the parent / as a result of the consolidation procsss, but am really struggling to see why it appears at the subsidiary level.
Thanks in advance!
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Goodwill (positive or negative) will arise when the value of the assets/liabilities acquired differ from the amount of money paid.
Sorry if i am being thick, but Just to be explicitly clear, are you saying that there doesn't have to be a purchase of another entity and that goodwill can arise even if just the consideration paid for the assets that constitute a business are > than the fair value of the assets?
The subsidiary bought a business. They presumably paid more than the recorded assets were worth. The excess is the goodwill.
Essentially this is what is happening in consolidation as well.
So basically it doesn't matter what form you buy the business in I.e if a share purchase or a an asset sale. The key thing is if there is a surplus above fair value then you recognise good will?
As example suppose you trade as a sole trader then decide to operate as a limited company and transfer the business to the company, you, the seller of the business, may when selling the business to the company have placed a value on the non tangible net assets of the business, how is the purchasing company to account for that figure it is paying?
So basically it doesn't matter what form you buy the business in I.e if a share purchase or a an asset sale. The key thing is if there is a surplus above fair value then you recognise good will?
Exactly.
Though you will occasionally find a deficit against fair value that you would recognise as negative goodwill as well. (Essentially the business is tanking but the buyer thinks they can turn it around if they don't have to pay full asset price).
Not personally come across that though.