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Sapna Takia

Can goodwill be negative?

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1 Answer

  1. This answer was edited.

    Negative Goodwill

    Yes, I believe goodwill can have a negative balance. We call this negative goodwill as “Bargain Purchase”.

    It’s a difference between the purchase price paid for an asset and its actual fair market value. Although you should know that it’s an extremely rare case scenario.

    Negative Goodwill v/s Goodwill

    I think if you get an idea of the difference between the two you will be in a better position to understand why it arises and what exactly does it mean.

    • Negative goodwill is exactly opposite to goodwill as while goodwill is favourable for the seller the bargain purchase is not favourable for his company
    • Negative goodwill arises when the purchase price of an asset is lower than its market value.
    • Whereas in the case of goodwill the purchase price is higher than its market value. To simply state it goodwill is a premium paid by the buyer for the assets of such another company.
    • While negative goodwill is favourable to the buyer the positive goodwill is favourable to the seller.

     

    In case of a bargain purchase the Purchase Price of an Asset < its Fair Market Value

    the above statement could be interpreted with the help of a below-mentioned example

    The company ABC faced financial distress for since a few years and hence the board of directors had only 2 alternatives left i.e either to sell the company or file for liquidation.
    The company was hence sold for an amount lower than its fair market value

    It is reflected from below mentioned illustration

    ParticularsPurchase ValueFair Market Value
    Inventory20,00040,000
    Trade Receivables40,00046,000
    Cash and Bank Balance50,00065,000
    Property plant and equipment1,50,000155,000
    Patents and Copyrights25,00035,000
    Assets285,0003,41,000
    Long term Debts65,00060,000
    Trade Payables20,00030,000
    Liabilities 85,00090,000
    Net Assets2,00,0002,51,000

     

    You would doubt that even though the goodwill can have a negative balance how shall it be presented in the Financial Statements. Moving ahead –

    Negative Goodwill in an income statement

    It should be recognized as a “gain on acquisition “ in the income statement of an acquirer.
    The below image would be of some help-

    The Gain on purchase of goodwill presentation in income statement

    Negative Goodwill in a Balance Sheet

    It can be shown as a part of liability or as a negative balance in the books of Seller Company since it unfavourable for such company whereas goodwill is shown as an intangible asset. Alternatively, such negative balance can also be shown as a negative balance under the intangible asset.

    I generally follow the alternative approach to present negative goodwill under the head of intangible asset but you can follow any method you are comfortable with since both are acceptable in the industry.

    If you are still confused about how to present negative goodwill in a balance sheet perhaps the below-stated example may be of some help
    Negative Goodwill in Extract of Balance Sheet


    Aastha Mehta

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