Summary of CIRD11070
- How to account for negative goodwill?
- Can goodwill have a negative balance?
- Is negative goodwill a debit or credit?
- What is another name for negative goodwill in accounting?
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AI Overview
AI Overview
Negative goodwill (
bargain purchase gain) occurs when the fair value of net assets acquired exceeds the purchase price. Under U.S. GAAP and IFRS, this gain must be recognized immediately on the income statement as a “gain on bargain purchase” in the period of acquisition. It is never amortized, as it represents an immediate increase in net income.
Accounting for Negative Goodwill: Steps & Treatment
Calculation:
Negative Goodwill
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Fair Value of Net Assets Acquired
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Purchase Price
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If the result is positive, it is a bargain purchase gain.
Initial Review: Before recording the gain, the acquiring company must reassess whether all acquired assets and liabilities were correctly identified and valued.
Income Statement (Immediate Recognition): The excess (negative goodwill) is recognized directly as a “Gain on Acquisition” or “Gain on Bargain Purchase”.
Balance Sheet: While historically treated as a deferred credit (liability), modern standards (IFRS 3/ASC 805) require immediate recognition in income, rather than listing it as a liability on the balance sheet.
Journal Entry:
Debit: Assets (at fair value)
Credit: Liabilities (at fair value)
Credit: Cash/Consideration Paid
Credit: Gain on Bargain Purchase (Income Statement)
Key Differences/Nuances
Distressed Sale: Negative goodwill often occurs in distressed sales where the seller must divest quickly.
IFRS vs. GAAP: Both standards generally align in recognizing the gain immediately in the income statement.
Non-monetary Assets: Older standards (e.g., FRS 10) suggested recognizing negative goodwill in the profit and loss account based on the depreciation of non-monetary assets, but current IFRS 3 and ASC 805 favor immediate recognition.
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CIRD11070 – Intangible assets within CTA09/PART8: asset conditions: goodwill
CTA09/PART8/S715
Definition
The statute provides that ‘goodwill’ carries the same meaning as it does ‘for accounting purposes’, i.e. the legislation follows the definition ascribed under ‘GAAP’. These terms are defined in CTA10/S1127 (see CIRD30020).
As a matter of accountancy, goodwill is simply the difference between the price at which a business changes hands and the aggregate value of the individual assets of that business after deducting the value of the liabilities taken over.
Internally-generated goodwill
“Goodwill” encompasses internally-generated goodwill. This was confirmed in the decision of Greenbank Holidays Ltd v HMRC Commissioners [2010] UK FTT 109 (TC) (“Greenbank”) and upheld by the Upper Tribunal in Greenbank Holidays Ltd v HMRC Commissioners [2011] UKUT B11 TCC.
FA09/S70 amended CTA09/S715 (3) to confirm that, for the purposes of the regime, goodwill includes internally-generated goodwill. CTA09/S715 (4) was added to confirm that, for the purposes of the regime, goodwill is treated as created in the course of carrying on the business in question.
These FA09 amendments merely clarified the position in relation to the pre FA09 legislation, which is that goodwill includes internally-generated goodwill; it did not change the rule. The FA09 amendments were confirmed as clarifications in the Greenbank decisions at the First-Tier and Upper Tribunals.
Consolidated goodwill
Where a company takes over a business by acquiring shares in the target company and the consideration given for the shares exceeds the ‘fair value’ (CIRD12735) of the net assets of the target company the excess is treated as goodwill in the consolidated group accounts. Goodwill of this kind does not appear in any company-level balance sheet and is outside the scope of Part 8.
Terminology
As in the legislation itself, references to intangible assets in the part of this manual dealing with the rules in Part 8 should be read as including goodwill except where it is clear from the context that is not the case.
‘Negative goodwill’
The price of a business will usually exceed the net value of its assets and liabilities but that is not always the case. Where the aggregate value of the assets exceeds the price paid for the business the difference is known as ‘negative goodwill’. This is a credit entry in a company’s balance sheet. Negative goodwill is not itself within Part 8 but sums written off negative goodwill may be taxable credits where, exceptionally, the negative goodwill is referable to intangible assets within Part 8 (see CIRD13080).
Application of statutory exclusions to goodwill
CTA09/S715 provides that Part 8 applies to goodwill ‘as it applies to an intangible fixed asset’. Goodwill could in principle therefore fall within the categories of excluded assets described at CIRD25000 onwards in relation to intangible fixed assets proper.
In practice, the following exclusions are most likely to be relevant to goodwill:
- CTA09/PART8/S803 (b) – assets held for the purpose of activities not within the charge to corporation tax (see CIRD25090)
- CTA09/PART8/S810 (1) – assets held for the purpose of a mutual trade or business (see CIRD25120)
- CTA09/PART8/S902 (1) – assets held for the purpose of life assurance business (see CIRD25115)
A number of rule changes have been introduced since 3 December 2014 in relation to goodwill and relevant assets. See CIRD44000 onwards.