In accounting, goodwill is an intangible asset that develops when the acquirer pays more than the fair value of the assets purchased and liabilities absorbed in a business combination. On the balance sheet of the acquirer, goodwill is defined as the worth of the acquired firm that cannot be directly attributed to its specific assets and liabilities.
In the accounting process for a corporate merger, determining goodwill is a crucial stage. The fair value of the assets bought and the liabilities undertaken is often used to determine goodwill as the difference between the consideration received and those two values.
The goodwill resulting from the purchase, for instance, would be $50,000 ($500,000 – $450,000) if Company A bought 100% of the outstanding shares of Company B for $500,000 and the fair value of the assets acquired and liabilities assumed was $450,000. On Company A’s balance sheet, this goodwill would be shown as an intangible asset.
It is crucial to take into account the possible effects of any non-controlling interests on the calculation of goodwill in addition to goodwill itself. In a business merger, the acquiring firm may not be fully owned by the acquiring company. The non-controlling interest refers to the stake held by non-executive shareholders in the firm.
In this situation, the controlling and non-controlling interests in the acquired firm must share the goodwill created by the business combination. The proportionate technique is commonly used for this, which divides up the goodwill according to the respective ownership stakes of the controlling and non-controlling shareholders.
For instance, if Company A pays $500,000 to purchase 80% of Company B’s outstanding stock, and the fair value of the acquired assets and assumed liabilities is $450,000, the goodwill generated by the transaction would be $50,000 ($500,000 – $450,000). The distribution of goodwill would be as follows if the non-controlling shareholders held the remaining 20% of Company B’s stock:
- Goodwill allocated to controlling interest: $50,000 x 80% = $40,000
- Goodwill allocated to non-controlling interest: $50,000 x 20% = $10,000
In this case, $50,000 in goodwill would be divided between the controlling and non-controlling interests in accordance with their respective ownership stakes in the purchased business.
In conclusion, determining goodwill in a corporate combination is a crucial stage in the transaction’s accounting. The amount of goodwill is determined by subtracting the amount of consideration from the fair market value of the assets bought and liabilities assumed. When a non-controlling interest exists in the acquired firm, the goodwill must be divided using the proportionate technique between the controlling and non-controlling interests.