By Ikechukwu Onuoma Esq. OBRA LEGAL Goodwill is an intangible asset for a company that comes in many forms such as: reputation, brand, domain names, commercial secrets, etc. It can be difficult to calculate, but there are two methods for doing so. Defining Goodwill Halsbury’s Laws of England (4th edition, Vol. 35) states that: “The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possesses.” International Financial Reporting Standards (mutatis mutandi) the Security and Exchange Commission, “Intangible Assets,” does not allow recognizing internally generated goodwill (Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance). The only accepted form of goodwill is the one that acquired externally, though business combinations or acquisition. For example, Facebook (FB) bought the domain name fb.com for $8.5 million from American Farm Bureau Federation. Apparently, this domain name did not have any other benefit than name. Thus, the whole amount paid can be considered as goodwill and Facebook would recognize it on its balance sheet. However, before the acquisition, the American Farm Bureau Federation could not recognize it on its balance sheet. Calculating Goodwill According to IFRS 3, “Business Combinations,” goodwill is calculated as the difference between the amount of consideration transferred from acquirer to acquiree and net identifiable assets acquired. The general formula to calculate goodwill under IFRS is:
Goodwill | = | Consideration transferred | + | Amount of non-controlling interests | + | Fair value of previous equity interests | – | Net assets recognized |
- Fair Value
- Non-controlling interest’s proportionate share of the acquiree’s net identifiable assets
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