This article discusses the basics of “Goodwill” from an accounting perspective.
Relevant Legislation:
- Income Tax Act 58 of 1962 (as amended)
- Taxation Laws Amendment act 5 of 2001 (and various amendments)
- Relevant Code of Practice: International Financial Reporting Standard 3 (IFRS3)
In discussing “Goodwill” the definition of an asset must first be understood as defined in the Income Tax Act as this has relevance from a Capital Gains Tax perspective.
‘Asset” includes:
- property of whatever nature, whether movable or immovable, corporeal or
- incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and
- a right or interest of whatever nature to or in such property;
The definition of ‘asset’ is of importance because CGT is not triggered until an asset is disposed of.
A wide definition has been ascribed to the term, which includes all forms of property and all rights or interests in such property. The exclusion of currency is dealt with below.
A few examples of assets are listed below:
- land and buildings, for example, a factory building, a person’s home, or holiday home;
- shares;
- a participatory interest in a collective investment scheme;
- an endowment policy;
collectables , for example,jewellery oran artwork ;- personal-use assets, for example, a boat;
- contractual rights;
- goodwill;
- a
trade mark ; - a loan;
- a bank account, whether local or foreign; and
- trading stock
Definition: Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. As per IFRS: 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 recognised.
Goodwill does not include identifiable assets that are capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability regardless of whether the entity intends to do so.
Goodwill also include contractual or other legal rights regardless of whether those are transferable or separable from the entity or other rights and obligations.
Examples of identifiable assets that are goodwill include a company’s brand name, customer relationships, artistic intangible assets, and any patents or proprietary technology. The goodwill amounts to the excess of the “purchase consideration” (the money paid to purchase the asset or business) over and above the total value of the assets and liabilities.
It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched.
Management is responsible for revaluation of goodwill every year and to determine if an impairment is required. If the fair market value goes below historical cost (what goodwill was purchased for), an impairment must be recorded to bring it down to its fair market value. However, an increase in the fair market value would not be accounted for in the financial statements.
Under IFRS, goodwill is never amortised (distribution of loan repayments into multiple cash flow installments).
Revaluation does not mean only an upward revision in the book values of the asset. It can also mean a downward revision (impairment) in the book values of the assets. Any downward revision in the book values of the assets is immediately written off to the Profit & Loss account. Under IFRS, an asset is considered to be impaired (and is thus written down) if its carrying amount is greater than its recoverable amount. The recoverable amount is the greater of the asset’s value in use (present value of future values) or net realizable value.
For more info about IFRS read this article.
Sources: SARS.GOV.ZA (Legal Counsel Guides), THESAITORG.ZA, SAAA.ORG.ZA
This article is provided for information only and does not constitute the provision of professional advice of any kind.