Internally generated goodwill

Learning objectives

• Explain why internally generated goodwill is never recognised.L1, L2
• Distinguish acquired goodwill (IFRS 3) from internally generated goodwill.L2

Normative references

• IAS 38 §48Internally generated goodwill is not recognised as an asset.
• IAS 38 §49Some expenditure is incurred to generate future benefits but does not result in an intangible asset that meets the recognition criteria; it is often described as contributing to internally generated goodwill. Such goodwill is not an asset because it is not an identifiable resource (neither separable nor arising from contractual or other legal rights) controlled by the entity that can be measured reliably at cost.
• IAS 38 §50The difference at any point in time between the fair value of the entity and the carrying amount of its identifiable net assets may capture a range of factors that affect the value of the entity; it does not represent the cost of intangible assets controlled by the entity and therefore cannot be recognised as such.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• True or false? An entity whose market value clearly exceeds the carrying amount of its net assets may recognise the difference as internally generated goodwill.L1
• Which of the following items held by the Ostrel group does not meet the identifiability condition?L2
• Ferlane believes that its reputation and organisation will bring it significant future benefits. Why can it not recognise this internally generated goodwill?L2
• The Orvino group is listing its expenditure for the year. Which items can be recognised as intangible assets?L3
• True or false? The goodwill that an entity builds up itself in the course of its business is not recognised as an asset in its statement of financial position.L1
• True or false? An entity may recognise its internally generated goodwill once an independent expert has established its value.L1
• True or false? Internally generated goodwill is not recognised because it is not an identifiable resource and its cost cannot be measured reliably.L2
• True or false? Training and promotion expenditure that strengthens an entity's reputation may be accumulated in internally generated goodwill as soon as it is probable that it will produce future economic benefits.L2
• How does an entity treat, in its financial statements, the goodwill it has generated internally?L1
• The Valtera group acquired Norvix in a business combination and recognised, under IFRS 3, goodwill on that acquisition. Its finance director notes that Valtera itself has a loyal customer base and a strong reputation, which in his view would justify its own goodwill of a comparable amount. Which statement is correct?L2
• Why is internally generated goodwill not recognised as an asset?L2
• The family company Brenac, whose net assets have a carrying amount of 12,000,000, received a takeover offer of 20,000,000 from a competitor, which it turned down. Its manager believes that the difference of 8,000,000 reflects the quality of its customer base, its know-how and its location, and wishes to recognise it as an asset in respect of goodwill. What is your answer?L2
• The Ostral group acquired Kemri two years ago; the goodwill arising from this business combination was recognised under IFRS 3. Since then, Ostral's own profitability and reputation have increased sharply. A consultant proposes applying to Ostral the valuation multiple used for Kemri in order to recognise goodwill specific to Ostral, measured consistently. What position do you take?L2
• To obtain a loan, Tandor has its business valued by an independent firm. The report attributes 3,500,000 of the value to the customer base, organisation and reputation of the business, without identifying any separate asset. The banker suggests showing this amount in the statement of financial position. What accounting treatment do you adopt?L2
• During the year, Helvan funds a training programme for its sales staff and an advertising campaign, in order to strengthen its reputation and customer loyalty. How is this expenditure treated?L1
• Which of the following statements about internally generated brands, titles and customer lists are correct?L2
• An independent valuer values Ravenel at 12,000,000, whereas the carrying amount of its identifiable net assets is 8,000,000. The chief executive proposes recognising the difference of 4,000,000 as an asset in Ravenel's statement of financial position. Which answer complies with IAS 38?L2