Amortisation of goodwill on consolidation

Goodwill can be described as the additional value obtained from an acquisition over and above the value of the net assets acquired. This additional value does not last for ever. Like other non-current assets, its value erodes over time. It is therefore appropriate to depreciate or amortise goodwill over a number of years after a subsidiary has been acquired.

When goodwill is amortised:

• The charge for amortisation each year is treated as an expense in the consolidated income statement.
• The value of goodwill in the consolidated balance sheet is its original value minus accumulated amortisation.

The goodwill arising at acquisition must be amortised (depreciated) over its estimated economic life, through the income statement. In the example of goodwill on consolidation, the goodwill on acquisition amounted to $1,000.

Example

A was incorporated on 1 January 20X5. On 1 January 20X7 it acquired 100% of the ordinary shares in B which was incorporated on that day. Two years later, on 31 December 20X9, the balance sheet of the two companies were as follow.

If we assume a life of ten years for this goodwill. Prepare a consolidated balance sheet at 31 December 20X9 for A and its subsidiary.

Solution

• The amoritisation is: $1000/10*3 = $300. The amoritisation through the income statement at $100 per year has reduced the accumulated profit balance.
• Non-current assets: $15,000 + (1000 – 300) = $15,700
• Accumulated profits: $10,000 + 3,000 – 300 = $12,700

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