Goodwill has been defined under IFRS 3 as following:
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised .
On analysing the definition we can understand that goodwill is an asset but is not the asset which can individually be identified and thus recognized separately.
Goodwill is measured by comparing:
(A) the aggregate of consideration transferred by the acquirer + Non-controlling interest + any previous equity interest in acquiree held by acquirer
(B) The net identifiable assets acquired and the liabilities assumed
Usually (A) is more then (B) in business combinations and a positive good will arise in this case. However, in some cases (B) can exceed (A) in which case negative goodwill will arise. IFRS 3 discusses it as gain on a bargain purchase.
Why negative goodwill or gain on bargain purchase may arise?
Negative goodwill or gain on bargain purchase or
simply bargain purchase may arise because of:
- forced sale
- recognition or measurement exceptions for particular items discussed under IFRS 3
- error in the valuation of identifiable assets, non-controlling interest and/or equity interest.
Conditions to be fulfilled
In case a negative goodwill arises then before this gain is recognized, acquirer must review the calculations to make sure that everything is arithmetically correct and no mistakes are made in measurement of different elements as negative goodwill does not arise normally and IFRS 3 requires the reassessment is done to be sure that no mistakes are made.
Accounting treatment of negative goodwill
Once it is confirmed that resultant is negative goodwill than the resulting gain should be recognized in the profit and loss at the acquisition date in the books of acquirer i.e. it will be taken as a gain in the consolidated income statement of the acquirer. All of the gain should be attributed to the acquirer.