hello everyone hi welcome to the channel of Wallstreetmojo Friend today we are
going to learn a concept that is a tutrial on negative goodwill whether it is
good or bad then that is what something we are going to discuss over here as you
can see there is a example over here of Aareal Bank which completes a $350 million
Westimmo acquisition if you go down over here there is an article over
here which is written that Aareal bank completes and there's written in a
statement of Aareal say that the transaction creates added value for the
Aareal bank from the very beginning partly with the negative goodwill approximately
close enough to 150 million recorded upon the closing recorded upon the
closing of the deal in addition to the one of that effect the transaction will
make a positive contribution to the Aareal bank group of a consolidated
operating profit so after reading this we have couple of things that are coming
in into our brain so let's get into the nitty-gritty of the same the very first
thing what exactly is negative goodwill so we have heard about goodwill a lot we
have heard about goodwill a lot right so it is an additional business pull you
know basically which an entity enjoys due to a relation with the customer okay
it matters a lot standing in the market known the quality of the product and
services etc so it may emanate from the proprietary technology or patent or
it is holding and then intellectual property right it holds and so on and so
forth see an entity which is having a goodwill will basically be capable of
generating more business with less input so it's like if you have more in more
goodwill then in that scenario with less efforts you can generate more output
more output means more sales and so on and so forth as compared to the
competitors with lesser goodwill or no goodwill in case of lesser it is
going to be the wise vice other case ok now you have heard about
I mean my question is that have you heard about negative goodwill if not I
mean does it mean a bad reputation or something have you seen any entity who
is losing business due to its brand or its negative goodwill well it's not
so the negative goodwill literally does not mean that at all now what we learned
in our example over here we note over here then from the above the Aareal Bank
they completed the acquisition of West lmmo that was for euros of 350 million
acquiring a euro 4.3 billion performing European commercial real estate loan
book so this transaction added value to the Aareal Bank as 150 million euro and
was record recorded as negative goodwill which we just saw round over here upon
basically closing the deal so basically in this tutorial we look at what is
negative goodwill and how does it adds value ok so that's what we are going to
get into the details the first and foremost thing my my first
thing is what is negative goodwill what is negative goodwill so that is my first
and the foremost calculation or something conceptual which I'm going to
talk about say negative goodwill is termed as coined in the context of one
company that is taking over the another let's say that is company A and then
they'll say Company B so A is taking over B and it's it's a gain basically
occurring to a former when the consideration is wait for an acquisition
let's say A is selling to B okay so what is the goodwill that should be
calculated for A so basically it is again the gain according to the A when
the consideration is paid for the acquisition to B for the acquisition
and is less than the fair market value of its net tangible assets in literal
term negative goodwill implies a bargain purchase very important this is now the
important aspect to ponder here is that why would someone be willing to sell the
entity's assets below its fair market value it is as simple as that
why would sum would be ready to do something like that well any wise person
would think that the assets can be disposed off at a fair market price and
then why and why question for negative goodwill will arise in the very first
place so well let's look into this see there may be circumstances when which
may force such a situation the first situation namely is force or distressed
sell forced or distressed sell that can be the first and the foremost thing the
second very important over here recognition of measurement exception for
particular item which is discussed in IFRS three that is the international
financial reporting standard third any error basically in you can say in the
valuations of assets or an controlling or non-controlling interest in any
entity so that can be one of the reason see negative goodwill is basically is a
gain for acquirer entity who is the acquire over here B is acquirer
and A is acquirer and B is acquire
so negative goodwill is a gain for an acquirer entity and should be recognized
okay for recognized in its books but before that acquirer must basically A
over here must review that the calculation to ensure that everything is
arithmetical correct now there is even basically there should not be any
mistake made in the calculation of various element as negative goodwill
basically does not arise normally so after all buying a business costlier
than the market price being in a notion that we have acquired the same at a
profit is not a wise idea so once it is confirmed that the net result is gained
that is gained on acquisition once we have confirmed that there is a gain on
acquisition the resulting gain should be recognized in the books of accounts that
is in the profit and loss account of the acquirer
that is A any change in the management or control of the company you know of
valuation of the asset must be performed according to the general accepted
accounting principle which is known as GAAP okay see this exercise is commonly
referred to as in you know purchase price allocation PPA that is purchase
price a location see this is called so because the purchase price of the
acquired company over here the acquired is which company's been acquired A okay
so the acquired company over here the value of the acquired company over here
is greater than the value of the acquired assets so this may also be
understood as the whole company is greater than the sum of its parts so
then the additional value of the whole company over and above is referred to as
goodwill as simple as that so there are certain transaction in which the total
value of the parts put together as an individual assets acquired in the
transaction it exceeds the price paid for the total company okay so this is
commonly known as bargain purchase now the next thing the positive goodwill
example if we go for the next most important thing that we are going to
discuss is positive a goodwill now to to understand the negative goodwill you
know it's helpful to understand the positive goodwill beforehand okay so in
a typical acquisition scenario that was in our case of A
you know acquired tangible assets include like you know your dators and
then you have your inventory that is your stock you have fixed assets and so
on and so forth okay machineries planted machineries and so on and so forth so
there may be number of intangible assets in addition to the tangible assets
which form a part of the acquisitions and are seen as a value drivers so this
intangible assets basically all goodwill in any patent copyright trademark can be
a brand name can be a patent or certain technology but can be license positive
customer relationships having capability to have an additional business pool this
is some of the intangible assets so to pass the test of the allocation it is
mandatory that there must be a legal enforceable contract to use this assets
in the favor of the acquirer company that is in our case of A okay
so after allocating the value of all these assets any exists amount
left over is considered as positive goodwill I hope you got the idea
regarding how things will worked out so let's see the example on how things are
work out in case of goodwill now this is an example as you can see this example
will show the purchase price allocation for 5 million acquisition so we have
receivables over here we have plant and machinery over here land and building
data there are some intangible assets like patent and trademark we have
unallocated intangible assets like goodwill and purchase consideration okay
so basically what we can see from the above that the fair value of the assets
which has been taken over over here is close enough to $4.2 billion
that is USD 4.2 billion million dollar which effectively means that the
price paid over and above the fair value of the asset is positive goodwill that
is close enough to 0.8 now you have got the idea regarding the positive
goodwill let's see some example on negative goodwill see most of the time
when you know business purchase basically see basically what you just
saw purchase consideration is how much as you can see 50 that is 5 million
right and the goodwill is 8 lakh so the difference is going to be your
assets okay so basically your assets unless your purchase consideration is
going to give you a balance in figure and that balance in figure is your
goodwill now let's see some negative goodwill example see one most of the
time business acquisition transaction happened would result in positive
goodwill there may be some instances where the fair value of the assets that
have been taken over is more than the price paid for the acquisition there's a
scenario typically results in to negative goodwill and generally it is
termed as we just discussed known as bargain purchase so using the same
example used in this particular scenario if the purchase price of the deal let's
say over here is 4 million instead of 5 million instead of 5 million
let say it is 4 million so the purchase allocation would be somewhat like this
as you can see all of the details remaining the same your complete assets
that is your tangible assets then your intangible assets it will remain the
same the only changes is your purchase consideration so when your purchase
consideration has been changed to a 4 million what do you see your goodwill
goes negative so you're deducting 4 million from all
this total so you basically this total is greater than your purchase
consideration then in that scenario goodwill will be negative if we revise
again we say that if all this value of the asset if that is less than the
purchase consideration that amounts to positive goodwill I hope you got the
idea now this type of scenario basically calls in additional analysis okay that
we will look shortly there are some signs you know which gives a negative
goodwill idea see there are several indication which suggests that you know
the transaction may be bargain purchased so some
indication sign of bargain purchase included like you know the acquired you
can say the acquired company has incurred a financial losses and in the
recent past or has been being in debt and is not able to service its debt the
second is that the net book value the NBV the net book value of the assets
taken over is more than the purchase consideration that has been paid okay
third that can be that the transaction has been carried out
secretly when possibility of the higher value is not been explored so you can
say over here I can write secretly the transaction has been taken conducted
secretly the fourth thing is that you know the a single bidder has taken
advantage of the situation and the absence of the in absence of the other
bidder so I'll just write single bidder over here as a pond as a part of the
PowerPoint the deal fifth one the deal has been finalized in a very haste
situation or in a haste condition within a very short span of time that can also
lead to negative the seller was compelled to sell the business against
his will or in a desperate situation then that can happen the seventh one is
that the existence of the very fact that the acquirer has more knowledge of the
acquired business so there should be a very strong reason as to why the
transaction is a bargain transaction and and the same should be documented
properly as to why a bargain purchases represented you the fair market value of
the assets taken over so if the purchase flies allocation cannot be articulated
precisely as to why the purchase price the location should be should have
negative goodwill this will call for a revaluation of the fair value of each
and every assets so in the absence of the above based you can see over here it
may be concluded that the fair value of the overall business
is more than the value of the purchaser consideration that is a purchase price
this means simply means that the transaction did not happen at the fair
value in such a situation the concluded fair value is the amount allocated to
the acquired assets and any excess amount or and about the fair value of
the business would be treated as extraordinary gains so finally to make a
final conclusion on the about the prime most implication of the bargain purchase
is that the gain of the buyer if it is a purchase below the fair value of the
acquire assets a bargain purchase gain should be recognized at the time of the
acquisitions and recorded as extra-ordinary item extra-ordinary
income basically extraordinary income so that is at the basically the date
of acquisition and however it is important to note that this is a gain for
a purpose of accounting or accounting only so this would no way to be
included in the calculation of income subject to taxes thank you everyone
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