What is goodwill?
Goodwill is normally considered intangible non-current assets in the consolidated statement of financial position when a company purchases another company where the fair value of net assets of the company being purchased is less than purchase consideration. The difference is considered as goodwill.
For example, ABC Co purchased 100% of DEF Co shares of USD500,000 in cash, and the net assets of DEF Co are USD450,000. In this case, ABC Co will have to recognize a goodwill amount of USD50,000 in its consolidated financial statements.
This goodwill will have to review for impairment annually and if there is any impairment then the value of goodwill will then be reduced by the impairment
To audit goodwill reporting in the company financial statements, auditors need to understand how the goodwill occurs, recognize, measure, and review.
The following are the list of basic procedures that should be performed when auditing goodwill:
- Review purchasing agreement: As we just men above, goodwill is recognized when a company purchased another company, and the consideration value is more than the net assets value. To assess if the information is correct, auditors should obtain a purchased agreement between both companies. The auditor should also review if the date of the purchasing date is agreed with the recognition date of goodwill in the financial statements. Once the agreement is obtained, the auditor review the purchase agreement to see if the consideration paid consideration payment and other payment requirements are correct.
- The auditor should also see there is any contingent consideration. Confirm this information is correctly incorporated in the goodwill calculation. In addition, auditors should obtain the payment vouchers to see if the payment has actually occurred. Cross-checking the payment amount to bank statements might need to be performed.
- Ownership is also an important factor in determining the value of goodwill recognized in the financial statements. Once the purchase agreement is completed, auditors should confirm ownership in the company’s shares registration documents. The legal documents that have the registered share might be different from one jurisdiction to another. And these kinds of documents should have been obtained from the regulator once the sell and purchase agreement is agreed upon by both parties.
- Review the board meeting minutes. After reviewing the ownership, auditors should also review if the boards authorize the purchasing transactions. The review should include the purpose of purchasing, purchasing price, and the date of purchasing.
- Before purchasing, the company normally asks the accounting firm to do the due diligence to assess the net assets of the targeted company. It is always advised to obtain the due diligence report to assess what is the net assets value, what are the key assets, and how much their value is. The report also has the value of liability as well as the details of those liabilities.
- The auditor should also perform their own calculation on goodwill to see if the client’s goodwill calculates correctly. If the result shows different, then the auditor should inquire about management and ask them for an explanation.
- Review impairment testing. Goodwill impairment should be assessed annually by the client; therefore auditor obtained the assessment and review if the assessment is correctly performed.