In a business combination how goodwill is accounted?

In the business combination, the goodwill is evaluated on the following criteria..

1) Market Standing of the company in terms of Penetration, Brand Acceptance, Share of Market ration.

2) Financial Strength of the company.

3) Working capital of the company.

4) Profitablility and annual growth of the company.

5) NAV of the company on the date of acquisition of the business.

On the basis of the above figure the goodwill amount is mutually agreed by both the parties (Buyer and Seller)  and accordingly it shall be then transacted in the respective books of accounts.

A business combination is the bringing together of separate entities or businesses into

one reporting entity. The result of nearly all business combinations is that one entity,

the acquirer, obtains control of one or more other businesses, the acquiree.

The acquisition date is the date on which the acquirer effectively obtains control of the

acquiree.

A business combination may be effected by the issue of equity instruments, the transfer

of cash, cash equivalents or other assets, or a mixture of these. The transaction may be 

between the shareholders of the combining entities or between one entity and the

shareholders of another entity. It may involve the establishment of a new entity to

control the combining entities or net assets transferred, or the restructuring of one or 

more of the combining entities. 

All business combinations shall be accounted for by applying the purchase method. 

 Applying the purchase method involves the following steps: 

(a) identifying an acquirer. 

(b) measuring the cost of the business combination. 

(c) allocating, at the acquisition date, the cost of the business combination to the

assets acquired and liabilities and provisions for contingent liabilities assumed. 

An acquirer shall be identified for all business combinations. The acquirer is the 

combining entity that obtains control of the other combining entities or businesses.

Control is the power to govern the financial and operating policies of an entity or

business so as to obtain benefits from its activities. Control of one entity by another

Although it may sometimes be difficult to identify an acquirer, there are usually

indications that one exists. For example: 

(a) if the fair value of one of the combining entities is significantly greater than that

of the other combining entity, the entity with the greater fair value is likely to be

the acquirer. 

(b) if the business combination is effected through an exchange of voting ordinary

equity instruments for cash or other assets, the entity giving up cash or other

assets is likely to be the acquirer. 

(c) if the business combination results in the management of one of the combining 

entities being able to dominate the selection of the management team of the

resulting combined entity, the entity whose management is able so to dominate is 

likely to be the acquirer. 

The acquirer shall measure the cost of a business combination as the aggregate of: 

(a) the fair values, at the date of exchange, of assets given, liabilities incurred or 

assumed, and equity instruments issued by the acquirer, in exchange for control

of the acquiree, plus 

(b) any costs directly attributable to the business combination.

 identify a business combination; 

 identify the acquirer in a business combination; 

 recognise and measure the cost of a business combination; 

 recognise and measure the identifiable assets acquired, the liabilities and contingent 

liabilities assumed and any non-controlling interest in the acquiree; 

 recognise and measure any goodwill acquired in a business combination or any gain on a 

bargain purchase; 

 account for goodwill after its initial recognition; 

 determine what information should be disclosed to enable users of the financial 

statements to evaluate the nature and financial effects of a business combination; and 

 demonstrate an understanding of the significant judgements that are required in 

accounting for business combinations and goodwill. 

.

Assets acquired are recorded in fair value. Amounts paid above fair value are recorded as goodwill. Subsequently, its tested for impairment annually. 

Basically Goodwill is a non tangible asset and it is highly important for businesses.

I DONT KNOW