When purchase price exceeds the net value of the business How is the difference dealt with?

Goodwill is defined as the price paid in excess of the acquired firm's total assets. To calculate it, simply subtract the total asset amount from the purchase price; this amount is nearly always a positive number.

For example, consider a firm that acquires another firm for $1,000,000. If the net identifiable assets of the acquired firm total $800,000, then the amount of goodwill realized is (1,000,000 -800,000) or $200,000.

Firm would debit Goodwill for $200,000, debit the acquired asset accounts for $800,000, and credit Cash for $1,000,000. Goodwill is an indefinite asset account and is recorded on the balance sheet.

Goodwill is neither depreciated nor amortized; instead, it is annually tested for impairment. Each year, the goodwill balance should be compared to its estimated market value. If the book value is too low, no adjustment is permitted. If the book value is too high, the balance must be "impaired" by marking it down to fair value.

If the goodwill account needs to be impaired, an adjusting entry is needed in the general journal. To record the entry, debit Loss on Impairment and credit Goodwill for the necessary amount.

As per IFRS-3, Business Combinations, it is treated as Goodwill.

Detailed definition of Goodwill as per IFRS-3 is the difference between:

1. The aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree.
2. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS3).