1. Valuation of Intangibles Goodwill

2. Recognizing and measuring goodwill Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In other words it represents a payment made by the acquirer in anticipation of future economic benefits from assets that cannot be individually identified and separately recognized.

3. Goodwill in a business combination in which consideration is transferred In a business combination in which purchase consideration is determined and payable, goodwill is measured as of the acquisition date as the excess of (a) over (b) below: the aggregate of (a)the fair value of the considerations transferred the recognized amount of any non controlling interest in the acquiree for a business combination achieved in stages, the fair value of any previously held equity interest in the acquiree. (b) the recognized and measured amount of the identifiable assets acquired and liabilities assumed. ( Non controlling interest in the acquiree should be measured at its fair value or at its proportionate share of the acquiree’s identifiable net assets)

4. Goodwill in a business combination in which no consideration is transferred In a business combination in which no consideration is transferred and in which the acquirer and the acquiree exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests, may be more reliably measurable than that of the acquirer’s equity interest. This could be the case when two mutual entities combine. In such cases, goodwill is measured as of the acquisition date as the excess of (a) over (b) below: the aggregate of (a) acquisition date fair value of the acquirer’s interest in the acquiree determined using a valuation technique that is appropriate in the circumstances and for which sufficient data are available the recognized amount of any non-controlling interest in the acquiree For a business combination achieved in stages, the fair value of any previously held equity interest in the acquiree. (b) the recognized and measured amount of the identifiable assets acquired and liabilities assumed

5. if more than one valuation technique is used in determining the fair value of the acquirer’s interest in the acquiree the acquirer should evaluate the results of the techniques, considering the relevance and reliability of the inputs used and the extent of the available data.

6. Example SR ltd acquires 75% of FI Ltd for Rs. 5 crore. The following information is available: a. Fair value of FI’s identifiable assets and liabilities Rs.6 crore. b. carrying amount of FI’s net assets Rs.5.5 crore. Compute the amount of goodwill in the acquisition

7. Goodwill is the excess of the sum of the fair value of consideration and non-controlling interest over the fair value of the net assets Fair value of consideration=Rs.5 crore Non controlling interest = proportionate interest in the fair value of identifiable assets and liabilities = Rs.1.5 crore (25% of 6 crore) Fair value of net assets =Rs.6 crore. Goodwill = (Rs.5 crore +Rs.1.5 crore) – Rs. 6 crore = Rs.50 lakh.

8. Example 2 Use the data as given in the above example. The following additional information is available: – instead of payment of a consideration of Rs.5 crore, SR Ltd issues two equity shares for every share of FI Ltd: – shareholders of FI ltd accounting 25% of the total equity interests do not exchange their shares. – The outstanding number of equity shares of SR Ltd is 50 lakh and of FI ltd is 25 lakh – Fair value per share of SR Ltd is Rs.15 and that of FI Ltd is Rs. 30 Compute the amount of goodwill in the acquisition

9. Goodwill is the excess of the sum of the fair value of acquirer’s interest in the acquiree and non- controlling interest over the fair value of the net assets Fair value of the acquirer’s interest in the acquiree (net of non-controlling interest) = Rs.5.625 crore (25 lakh shares- (25 lakh shares x 25%) x30 Non-controlling interest= proportionate interest in fair value of identifiable assets and liabilities = Rs.1.5 crore(25% of Rs.6 crore) Fair value of net assets =Rs.6 crore Goodwill = (Rs.5.625 crore +Rs.1.5 crore)- Rs6 crore=Rs1.125 crore

10. More about Goodwill Goodwill cannot be developed by a company through its actions, and it is only created by the purchase of other companies for more than the fair market value of their tangible assets. Many large firms created through acquisitions, report a large amount of goodwill in their statements of financial position. Although goodwill generated internally is never recognized as an asset, when one business purchase another the amount paid would be equal to the fair market value of tangible assets only by rare coincidence. Instead any excess paid over the value of tangible and identifiable intangible assets is recorded as goodwill.