How to Account for Negative Goodwill

Negative goodwill arises when a company is purchased for less than the fair value of its net assets. It occurs when the acquirer pays less than the book value of the net assets of the acquired company. In accounting terms, negative goodwill is recognized as a gain on acquisition.

Here are the steps to account for negative goodwill:

1. Determine the fair value of the net assets acquired: The fair value of the net assets acquired should be determined and compared to the price paid for the acquisition. If the price paid is less than the fair value of the net assets, negative goodwill is recognized.

2. Recognize the gain on acquisition: Negative goodwill is recognized as a gain on acquisition in the income statement of the acquirer. This gain represents the difference between the fair value of the net assets acquired and the price paid for the acquisition.

3. Allocate the negative goodwill: The negative goodwill should be allocated to the individual assets acquired based on their fair values. The allocation process will involve adjusting the carrying amounts of individual assets acquired to their fair values.

4. Recognize the impact on financial statements: The recognition of negative goodwill will impact the balance sheet and income statement of the acquirer. The increase in the income statement due to the gain on acquisition will be reflected in the retained earnings account of the balance sheet.

In summary, accounting for negative goodwill involves recognizing the gain on acquisition and allocating the negative goodwill to the individual assets acquired. It is important to accurately determine the fair value of the net assets acquired and follow proper accounting procedures to ensure accurate financial reporting.