Accounting Treatment of Purchased Goodwill
After having acquired purchased goodwill the first question that arises in your mind is – How to treat this acquired Goodwill in your books of accounts? Wheather to show it as an asset along with other possessions of the business and to slowly amortize it over its useful life or to retain it in the business or to immediately write it off against capital reserve. If you decide to amortize this goodwill you again have to decide how to write it off i.e. against your profits or against reserves. Here we are giving you some options to treat Purchased Goodwill in your books.
1) To show it as an asset in the Balance sheet of the company like other assets. Its estimated useful life is determined. It is then written off (amortized) over its estimated useful life through Profit and Loss account or Income statement.
2) To show it as an asset in the Balance sheet and amortize it over its estimated useful life against general reserve or capital reserve or both.
3) To eliminate it completely against capital reserves immediately on its acquisition.
4) To write it off just like any other expense through Profit and Loss account in the accounting period in which it was acquired.
5) To retain it in your business, unless a permanent reduction occurs in it due to circumstances.
Goodwill and Accounting Standard (AS) – 10 : Accounting For Fixed Assets:
AS-10 Accounting for Fixed asset requires you to treat Goodwill in your books as follow:
1) Goodwill can be recored in the books only when it has been acquired after paying some consideration in money;
2) On acquisition of a business entity by some another one for a price, If the price exceeds the value of net assets taken over, the difference in the price paid and the value of net assets is termed as Purchased Goodwill and it is shown in the Balance sheet of the acquiring concern.
3) Goodwill should be written off as early as possible.
Goodwill and Accounting Standard (AS) – 14: Accounting for Amalgamation:
It provides for the following treatment of Goodwill in the case of amalgamation in the nature of purchase:
1) Goodwill arising on amalgamation represents a payment made in the anticipation of future profits and it is appropriate to show it as asset in the books of accounts.
2)This Goodwill should be amortized to income over its useful life on a systematic basis.
3) It is appropriate to amortize Goodwill over a period not exceeding 5 years unless a longer period can be justified.
4) While estimating the useful life of Goodwill, the following factors should be considered:
i) The foreseeable life of the business or industry;
ii) The effect of product obsolescence, change in demand and other economic factors;
iii) The service life expectancies of the key individuals involved or group of employees;
iv) Expected actions by competitors or potential competitors; and
v) Legal, regulatory or contractual provisions affecting the useful life.