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Ifrs 3, Which Became Applicable From March 31, 2004, However Made It ...

IFRS 3, which became applicable from March 31, 2004, however made it mandatory for EU companies to identify the acquirer, adopt the purchase method of accounting for accounting of business combinations, and discontinue amortisation of goodwill for accounting periods beginning after that date. Nowadays, the acquirer, at the date of the acquisition, needs to allocate the cost of the business combination by recognizing, at fair value, the identifiable assets, liabilities and contingent liabilities of the acquiree, as well as those of minority shareholders. The difference between purchase price and value of net assets comprises the money paid for goodwill. In certain cases, some intangible assets form part of the assets acquired for the business combination. These become eligible for separate recognition on the fulfilment of certain conditions, to elaborate, these assets they need to be separately identifiable, controlled by the entity, capable of yielding future economic benefits, and have values capable of measurement.

IFRS procedures stipulate that goodwill, on an ongoing basis, will be subject to measurement at cost, and annual tests for impairment, in accordance with IAS 36. This is a significant departure from the provisions of IAS 22, which treated goodwill as a wasting asset, needing amortisation over a specific period. Negative goodwill, as stated earlier, arises when the cost of acquisition is less than the fair value of the identifiable assets, liabilities and contingent liabilities of the company. While its occurrence is rare, it can well arise in the case of acquisition of loss-making units, or if a distress sale gives a company the opportunity to acquire a bargain. Negative goodwill, as per IFRS 3, needs immediate recognition in the profit and loss statement for the period. This requirement also differs significantly from previous accounting practice that allowed the allocation of negative goodwill over a range of assets, or allowed it to be amortised over a period.

Goodwill, as stated earlier, is not eligible for amortisation, with effect from March 31, 2004, under IFRS procedures and is now considered to be an asset with indefinite life. It however requires the application of a stringent impairment test, either annually, or if the need arises, at shorter notice, for assessment of erosion in value. In the event of impairment, the Profit and Loss Account is charged with the computed impairment amount to ensure the immediate highlighting of poorly performing acquisitions. The accounting treatment of goodwill, as stipulated by IFRS 3, is not that of a steadily wasting asset, but one with indefinite life; and with a value linked to the performance of the unit.

The test for impairment of goodwill under the IFRS, unlike US GAAP, occurs at the level of the Cash Generating Unit, or a group of CGUs, representing the lowest level at which internal managements monitor goodwill.


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