Query No. 17 Subject: Amortisation of goodwill on consolidation.1
A. Facts of the Case.
1. A company (hereinafter referred to as ‘the company’) has acquired an entity for which the company has paid higher consideration than its net assets value and the differential amount was considered as goodwill on consolidation.
2.The querist has stated that the Accounting Standards notified by the Companies (Accounting Standards) Rules, 2006, notified by the Central Government suggest the following two treatments:
According to the querist, since there were two options available to the company, the company had decided to amortise the goodwill on consolidation over a period of 10 years as a matter of financial prudence. However, after revisiting the said policy and also after observing that most of the enterprises have elected the policy of impairment test of goodwill, the company, in view of good practices, would like to change the existing policy of amortisation to impairment test of goodwill from 1st April, 2012.
B. Query
3. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee of the Institute on the following issues:
C. Points considered by the Committee
4. At the outset, the Committee wishes to point out that impairment is independent of amortisation. In other words, irrespective of whether an asset is to be amortised or not, an asset is to be tested for impairment as per the provisions of the relevant Accounting Standards, e.g., AS 26 and AS 28. Thus, the Committee is of the view that there is no option available to the company with regard to impairment. Accordingly, in the extant case, the issue that may arise is whether the company can change the accounting policy from amortisation of goodwill on consolidation to non-amortisation of the goodwill. The Committee has, therefore, considered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, initial recognition of goodwill arising on consolidation and its valuation, determination and recognition of impairment, whether such possible change in accounting policy should be from retrospective effect or prospective effect, prior period item, if any, due to such possible change, etc. The Committee has further presumed from the Facts of the Case that the goodwill in the extant case is arising due to acquisition of an entity and not by way of any other mean/mode.
5. The Committee notes that Accounting Standard (AS) 21, ‘Consolidated Financial Statements’, notified under the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as the ‘Rules’) does not deal with amortisation of goodwill arising on consolidation. The Committee is of the view that paragraphs 16.1 and 16.2 of AS 10, notified under the ‘Rules’, as referred to by the querist in the Facts of the Case deal with the goodwill arising on acquisition of a business other than by way of amalgamation or by way of acquiring an entity (as in the extant case) and accordingly, these paragraphs cannot be applied in the extant case. The Committee further notes that Accounting Standard (AS) 26, ‘Intangible Assets’, notified under the ‘Rules’ does not apply to goodwill arising on consolidation. Accordingly, the Committee is of the view that in the absence of any Standard dealing with the amortisation of goodwill on consolidation, the company has an option to amortise or not to amortise such goodwill.
6. The Committee notes the following paragraphs 29 and 30 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, notified under the ‘Rules’:
The Committee notes that in the extant case, neither any new Standard has come into existence nor any Statute has been modified which requires a change in accounting policy. Accordingly, the fact that other companies are following this accounting policy cannot be a ground for change in accounting policy as the facts and circumstances of each case can be different. The company should make a judgement in its own facts and circumstances and if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise, the company can change its accounting policy from amortisation of goodwill to non-amortisation where the goodwill arises on consolidation pursuant to acquisition of an entity. As regards disclosure required on such change in accounting policy, the Committee notes following paragraphs of AS 5:
Accordingly, the company should make the above disclosures while changing its accounting policy.
D. Opinion
7. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 3 above:
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