Question 1

What is the difference between Goodwill and other intangible assets like patents?

Accepted Answer

Goodwill is unidentifiable; it represents a collection of positive attributes that cannot be individually separated and sold, like reputation or morale. Other intangible assets, like patents or trademarks, are identifiable. They can be separated from the business and sold, and they have a finite legal life.

Question 2

Is Goodwill amortised (depreciated) over time?

Accepted Answer

Under current IFRS rules (IFRS 3), goodwill is not amortised. Instead, it must be tested for impairment at least annually. This means the company must assess if the value of the goodwill has decreased. If it has, an impairment loss is recorded.

Question 3

Why do we use 'fair value' instead of the 'book value' from the old company's accounts?

Accepted Answer

Book value is based on historical cost less accumulated depreciation, which may not reflect the asset's true current worth. Fair value represents the realistic market value at the date of acquisition. Using fair value ensures the acquirer's financial statements provide a more accurate and relevant picture of the new, combined entity's financial position.

Question 4

What happens in the books of the business that was sold (the vendor)?

Accepted Answer

The vendor must close their books. This typically involves transferring all assets and liabilities to a 'Realisation Account'. The purpose of this account is to calculate the profit or loss on the sale of the business. The purchase consideration received is credited to this account, and the final balance (profit or loss) is transferred to the owner's capital account(s).

Business Acquisition and Merger

What you need to know