I have taken over the bookkeeping and tax returns for a partnership that runs a cafe.
In the balance sheet there is a figure for goodwill of £ 2250.00 (I assume from when they bought the business)
Now they have been paying somebody money every week over 5 years - the person they bought the business from. They finished paying him in the 2013/14 tax year (the year I am doing) and now the business is theirs and they don't owe anything from it. It as in the accounts as a loan.
Do I now need to write this 'goodwill' off? and how to I write this off? I am using VT, so any help on the entries I need to make would fantastic! I've tried looking it up but really not sure how to do it.
Does writing off the goodwill only affect the balance sheet? and not the profit and loss? So there will be no tax benefits to writing off the goodwill.
See IAS 38 Intangible assets and IAS36 Impairment of assets.
Goodwill was created as an Intangible asset as a result of consideration received above net assets at the time of the business acquisition by the current owners. IAS36 requires goodwill to be tested for impairment annually to see if the carrying amount is more than or equal to the recoverable amount.
Therefore, you need to see if the Goodwill is still worth what is stated on the Balance sheet, if not then impair it. That means crediting Goodwill: Impairment Loss, debiting Expenses: Impairment loss.
You also need to review each year whether the goodwill has an indefinite life, if not then you have to establish its useful life and residual value(if any) and then need to amortise it(same as depreciation).
I started to answer this one as almost fell into the pit trap of IFRS not being the same as the old UK GAAP in this area but FRS102 actually bringing them in line.
My worry about the original post was the confusion between the liability of the deferred consideration (qute seperate to Goodwill) and the reducing Goodwill figure the two being quite different things.
Also, amortisation and depreciation are not the same for tax purposes which is what causes HMRC such constenation about the treatment of goodwill (Depreciation being added back in the tax calculation where amortisation is not). So the loopholes around goodwill valuation are getting a lot of attention.
I was actually waiting for more details to come out in discussion in the thread before jumping in but thought that I would just jump in a little early to emphasise that UKGAAP and IFRS are (currently) different in this area so just something to be aware of.
The way that the original question was phrased I'm wondering if this was ever actually goodwill at all as it's written as though its just deferred consideration.
Rachel, Amortisation/Impairment of the Goodwill is a P&L item. On the B/S the reducing Goodwill is matched to the amortisation/impairment adjusted net profit/loss brought over from the P&L for the period.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Rather frighteningly I did understand the reply - but haven't done that section of study yet... my question would be how do you test the value of the Goodwill?
The initial purchased Goodwill is clear enough, being the difference between the fair value of the net assets and the fair value of the consideration given and boils down to how well the two party's bargain the sale price of the business.
Calculating the impairment seems to me a bit like picking numbers out of the air! Though I can see the point of reducing the Goodwill over some sort of term as it is picked up by the new owners and changes into inherent goodwill.
Amortisation makes more sense as you set a term over which the original owners may be inferred to still be 'assisting' in the business by virtue of local memory.
Is there any reason Shaun, why one can't have both Goodwill and a deferred consideration? Other than that it is unusual?
no, please keep posting as the only way to expand one's knowledge is through discussion. Goodness only knows the amount of additional knowledge that I've picked up on here from people questioning things outside the norm (The difference in tax treatment of red diesel being one that springs to mind).
There will be times when posters disagree but the difference with this site is that we appreciate that all of us, no matter how experienced are always learning as this is a constantly changing profession (thankyou FRC and HMRC!!!).
Much better we voice assumptions here for others to correct any misconceptions rather than such ending up on clients tax returns and / or in their accounts.
The added issue in this discussion is a variance between the historical UKGAAP (which is changing) and IFRS treatment (which is the future). All of the professional bodies know where standards are going so teach IFRS which may cause some challenges during this transition period (that really started in 2007).
As noted above, the difference between depreciation and amortisation (not something often made clear to students) makes goodwill a contentous focus of attention for HMRC which in turn makes this an area that we need to tread carefully in.
Another point on that is that students tend to be taught about the accounting and tax treatment of amortisation and depreciation in seperate modules so the differences between them from the two different perspectives may not be immediately apparent.
I look forwards to having many professional discussions with you on the site Richard,
kindest regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
no reason at all, I was simply saying that they are different things, not that they are mutually exclusive.
I would not link goodwill to retaining expertise of the original owners.
Sorry that this is short and sweet but got to go out now so looking forwards to seeing how this thread develops when I return later.
Actually, just before I go I think best that I leave people with the definition of goodwill to chew on as I think that that some confussion may be occuring as to what it is (this is from memory so not word perfect, sorry).
Goodwill is the excess of the cost of acquisition over the acquirers interest in the fair value of the identifiable assets and liabilities acquired as of the date of the exchange transaction.
have fun and talk later,
kind regards
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
or what to do with it ahhhhh
