Treatment of Goodwill Under Ind AS

Introduction

Goodwill is an intangible asset that arises when a company acquires another entity for a price higher than the fair value of its identifiable net assets. In the context of Indian Accounting Standards (Ind AS), the treatment of goodwill is governed primarily by Ind AS 103 – Business Combinations, and Ind AS 36 – Impairment of Assets. This article explores the key principles, measurement, recognition, and impairment of goodwill under Ind AS, with illustrative examples for better understanding.

Recognition and Initial Measurement

Under Ind AS 103, goodwill is recognized as an asset when an acquirer gains control of a business. It is calculated as the excess of the purchase consideration over the fair value of the identifiable net assets acquired.

Example: Company A acquires Company B for ₹1,000,000. The fair value of the identifiable net assets of Company B is ₹800,000. The goodwill recognized in the books of Company A would be:

Description	Amount (₹)
Purchase Consideration (A)	1,000,000
Fair Value of Identifiable Net Assets (B)	800,000
Goodwill (A-B)	200,000

Subsequent Measurement

Goodwill acquired in a business combination is subsequently measured at cost less any accumulated impairment losses. Ind AS does not permit the amortization of goodwill; instead, it requires an annual impairment test or more frequently if there are indicators of impairment.

Impairment of Goodwill

Ind AS 36 prescribes the procedures for impairment testing. Goodwill is tested for impairment at the level of the cash-generating unit (CGU) to which it belongs. A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups of assets.

Example: Continuing from the previous example, suppose Company A has two CGUs, CGU X and CGU Y, and the goodwill from the acquisition of Company B is allocated entirely to CGU X. At the end of the reporting period, the carrying amount of CGU X, including goodwill, is ₹500,000, and its recoverable amount (the higher of fair value less costs of disposal and value in use) is ₹450,000.

The impairment loss recognized would be:

Description	Amount (₹)
Carrying Amount of CGU (A)	500,000
Recoverable Amount of CGU (B)	450,000
Impairment Loss (A-B)	50,000

The impairment loss is first allocated to reduce the carrying amount of goodwill allocated to the CGU and then to the other assets of the CGU on a pro-rata basis.

Allocation of Goodwill

Goodwill must be allocated to each of the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. This allocation should be completed before the end of the annual period in which the acquisition is made.

Example: Suppose Company A expects CGU X to benefit 60% and CGU Y to benefit 40% from the synergies of acquiring Company B. The goodwill of ₹200,000 would be allocated as follows:

Description	Calculation	Amount (₹)
Goodwill allocated to CGU X	₹200,000 × 60%	120,000
Goodwill allocated to CGU Y	₹200,000 × 40%	80,000

Steps to Determine the CGU for Goodwill Allocation

• Identify the Smallest Group of Assets:

Determine the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.

• Assess Independence of Cash Inflows:

Evaluate the interdependency of cash inflows. A CGU should generate cash inflows that are largely independent from other assets or groups of assets.

• Consider Internal Management Reporting:

Review how management monitors and makes decisions about the operations. Often, CGUs are determined based on the internal reporting structure of the company.

• Review Synergies from Business Combinations:

Identify the units that are expected to benefit from the synergies of the combination. Goodwill should be allocated to these CGUs.

• Allocate Goodwill Proportionally:

If goodwill relates to multiple CGUs, allocate it based on the relative value or the expected benefit derived from the goodwill.

Example: Company A acquires Company B and recognizes ₹500,000 as goodwill. Company A has three operating segments: Segment X, Segment Y, and Segment Z. After the acquisition, the following steps are taken to determine the CGUs and allocate goodwill.

1. Identify the Smallest Group of Assets
Segment	Product Lines
Segment X	X1, X2, X3
Segment Y	Y1, Y2
Segment Z	Z1
2. Assess Independence of Cash Inflows
Product Lines	Independence
X1, X2, X3	Interdependent
Y1, Y2	Interdependent
Z1	Independent from others

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3. Consider Internal Management Reporting
Segment			Management Review
Segment X			Single unit
Segment Y			Single unit
Segment Z			Single unit
4.Review Synergies from Business Combinations
Segment		Benefit from Synergies (%)
Segment X		60%
Segment Y		40%
Segment Z		0%
5. Allocate Goodwill Proportionally
Description	Segment X			Segment Y	Segment Z
Goodwill Allocation (%)	60%			40%	0%
Goodwill Allocation (₹)	30000000%			20000000%	0%

Disposal of an Operation

When a CGU to which goodwill has been allocated is disposed of, the goodwill associated with the CGU is included in the carrying amount of the CGU when determining the gain or loss on disposal.

Example: Company A decides to sell CGU X, which has allocated goodwill of ₹120,000. The sale proceeds are ₹600,000, and the carrying amount of CGU X (excluding goodwill) is ₹400,000. The gain on disposal would be calculated as:

Description	Amount (₹)
Sale Proceeds (A)	600,000
Carrying Amount of CGU (B)	400,000
Allocated Goodwill (‘C)	120,000
Total Carrying Amount (D= (B+C))	520,000
Gain on Disposal (A-D)	80,000

Conclusion

The treatment of goodwill under Ind AS emphasizes fair valuation and impairment testing over time. This ensures that financial statements reflect the true value of acquired assets and the economic benefits expected to arise from the acquisition. By adhering to these standards, companies can provide more accurate and meaningful information to stakeholders.