What Is Negative Goodwill?

In contrast to goodwill, it is the difference between the investment cost of the purchased enterprise and the fair value of the net assets of the merged enterprise. The reason for the formation of negative goodwill is exactly the opposite of that for goodwill. In practice, the occurrence of negative goodwill is often due to the existence of unfavorable factors on the books of the merged company. For example, the company has shown signs of poor management, and there have been many adverse social influences or business activities, which have led to various subsequent issues. Profits have decreased and cash inflows have decreased, thereby making the transaction price of both parties to the merger lower than the fair value of the net assets of the merged enterprise.

Negative goodwill

Right!

In contrast to goodwill, it is the investment cost of buying a company is lower than the net assets of the merged company

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From a practical point of view, there are generally two ways to deal with negative goodwill:

The revised International Accounting Standards No. 22-Business Consolidation stipulates that negative goodwill shall be the equity in the fair value of identifiable assets and liabilities obtained by the purchaser, minus the purchase cost, and no longer identifiable The difference between assets and liabilities that exceeds the purchase cost is apportioned to reduce the fair value of the identifiable assets purchased. Specifically, the revised standard requires negative goodwill to be deducted from goodwill, and the differences are recognized as revenue in the following cases:

70's, famous in the United States

At present, the accounting community understands "the difference between the purchase cost and the identifiable net asset fair value of the purchased enterprise" as negative goodwill. So what is the reason for the negative goodwill? The author believes that there are the following points:

The understanding and accounting treatment of the difference between the purchase cost and the fair value of the identifiable net assets is currently controversial and lacks a unified understanding. The more representative views are:

Negative goodwill

. This view regards negative goodwill as a liability, which is "the responsibility of the merging enterprise for the future depreciation of assets or the reduction of earnings for the merged enterprise". The reason why an enterprise transfers at a price lower than the fair value is because after the merger, the purchasing enterprise must bear the hidden costs (or hidden liabilities) of the purchased enterprise, resulting in the future payment of economic resources, and negative goodwill is reflected as one Kind of future debt. "The value of negative goodwill is a kind of ex ante compensation for the future losses of the buying company." This view better explains that the purchase price formed when the purchased company has hidden liabilities is lower than the identifiable net purchase. The fair value difference of assets did not provide a reasonable explanation for the negative goodwill caused by other reasons. According to the provisions of China's "Enterprise Accounting System": Liabilities refer to the current obligations formed by past transactions and events, and the performance of this obligation is expected to cause economic benefits to flow out of the enterprise. One of the basic characteristics of debt is that the disappearance of debt requires the debtor to repay in a manner acceptable to the creditor, or the creditor waives the creditor's right. Negative goodwill occurs because of a price difference formed by the company during the purchase process. No one party has the right to this price difference. It does not need to pay assets or labor in the future, nor need to borrow new debt to repay. It does not have the inherent nature of debt.

Negative goodwill

. According to this view, the reason why the purchased company is willing to sell at a price lower than the fair value of the identifiable net assets is because the acquired company has a well-known brand, a good sales network, high market share, and advanced management experience. For intangible assets not accounted for, the purchased company is willing to attract the attention of the purchasing company at a lower price in order to obtain these advantages of the purchasing company. Therefore, "the negative goodwill shown in the acquisition is just a transformation of the acquired company's own goodwill, and the existence of negative goodwill must be the acquired company's own goodwill." "The reason why it behaves as negative goodwill is because the goodwill of the acquiring company is not accounted for." This view uses negative goodwill in the purchase process to determine the value of goodwill, which negates the objectivity of goodwill, and is not consistent with the current The accounting practices that identify self-made goodwill are contradictory. Because if the negative goodwill value formed in the merger and acquisition is accounted for as the self-made goodwill value of the buying company, then the size of the self-made goodwill value of a company will depend on the number of times the company purchases other companies at a low price and the formed negative goodwill The magnitude of the reputation value is in conflict with the nature of goodwill.

Negative goodwill high valuation

. According to this view, the main reason that causes the purchase cost to be lower than the fair value difference of the identifiable net assets of the purchased enterprise is: the value of the non-monetary assets (or non-current assets) of the purchased enterprise is overvalued, so it is claimed that Goodwill is written off in proportion to the value of various non-monetary assets purchased by the enterprise, and the balance after offsetting is classified as deferred income, which is amortized evenly within the specified period of validity, or immediately recognized as income. This view is respected by the United States and International Accounting Standards Board. The advantage of this method is that it avoids the false calculation of the value of assets and liabilities, which meets the requirements of the principle of caution. The disadvantage is that it only understands negative goodwill as an overestimation of the value of assets, negating the impact of other factors on negative goodwill. If the negative goodwill is proportionally reduced against the fair value of the non-monetary assets (or illiquid assets) of the purchased enterprise, then the value after deduction does not represent the fair value of the assets nor its historical cost. Accounting The comprehensibility of the information is reduced. In the future business period, the purchased company will match its income with a lower asset amortization cost, resulting in a false increase in profits. The essence of this treatment method is to associate the amortization of negative goodwill with the useful life of the asset and the depreciation method. As a result, different amortization methods are used for the same project, which violates the principle of inertia of accounting.

Negative goodwill

According to this view, negative goodwill and goodwill are the difference between the purchase price and the fair value of its net assets under the merger purchase method, but one is negative and the other is positive. The essence is the same. All are a reflection of the company's future excess profitability. The reason why a purchaser is willing to purchase another company for an amount lower than the fair value of the net assets is also to obtain more than the average level that may be brought by the purchase of the company's net assets. Excess returns, not to achieve below-social average profit levels. Therefore, the negative goodwill is understood as the future excess profitability of the enterprise as reflected by the difference between the price paid by the purchasing company to obtain all the net assets of the acquired company and its fair value. This perspective understands negative goodwill as the corresponding concept of goodwill, which is a kind of negative goodwill. It not only acknowledges the existence of negative goodwill, but also distinguishes goodwill assets into positive goodwill and negative goodwill. Difficult to establish in theory.

Negative goodwill a gain

According to this view, the completion of the merger by the buying company at a price lower than the fair value of the net assets of the purchased company is undoubtedly a gain for the buying company, that is, the buying company exchanges more net worth with less capital. Assets, this difference is a savings in the process of asset transactions, is a gain. Some have argued that this gain should be treated as a deferred income and amortized in installments. This view actually understands negative goodwill as a discount on investment and uses the same accounting treatments as general stock and bond investments. This view better reflects the negative goodwill formed due to the hidden liabilities and unfair transactions of the purchasing company. However, using negative goodwill as deferred income and amortizing it into each period of income will definitely increase the total income of each period, leading to blind optimism for users of financial statements, and also creating artificial adjustment of profits for corporate managers. Convenience will also increase the tax burden of enterprises without cash inflows in the future. In addition, according to whether the accounting information generated by the amortization of the negative goodwill profit period is useful, what is the nature of the unamortized deferred income, whether it is listed in the financial statements as a liability item or as an owner's equity item, There is still a lot of controversy, which may reduce the understandability of accounting information.