Hi! On one of the interview I was asked if there were an acquisition deal where A company was going to buy Burger King but with no further use of their brand with purchase price >> fair value. Is there a goodwill? As far as I can understand we capitalised goodwill then test it for impairement and with no further use write it off.Can you please help me?
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Who is the buyer? McDonald's? Wendy's? Big Kahuna?
No name, different industry
Maybe KFC then....
Yes.
This is fundamentally an accounting question rule, and Goodwill = price - fair value. That's what GAAP dictates. Nowhere in this does GAAP say you only do this if you intend on using brand assets.
Is the same for IFRS?I was told that my answer is wrong but wasn't given what they considered the right one.
There would be goodwill, but no tradename/trademark/brand value, which is an identifiable intangible asset separable from goodwill. You would test for impairment, however if the enterprise value is greater than the book value there is still value to the goodwill. If there is anything of Burger King's that you are still using - recipes, culture, business model (just under a different name) etc - that is goodwill. Now if we're saying that the entire company would be destroyed via the acquisition (maybe the buyer really hates Burger King- I realize this makes no sense, but as an example) then there would be impairment as that entire business segment would not be generating any cash flow. There could also be impairment if the business unit starts to tank without the use of the brand name (but we won't go down that rabbit hole).
Thank you but if there no brand value on the balance sheet I assume that brand name=goodwill.And than impairment?They use same restaurants but without a name.
Yes there's goodwill. In this case, there would be a lot of it.
Goodwill is the purchase price (usually considered to be FV) less all identifiable assets (tangible and intangible). An example:
FV of Tangibles: $100 FV of Trade Name: $100 Purchase Price: $250 Goodwill: $50
But the situation you describe looks more like this:
FV of Tangibles: $100 Purchase Price: $250 Goodwill: $150
Thank you but what happen next?Impairment? I was told that my answer is wrong.No value for brand name.
There is no value to the brand name if it will not be used. You would book goodwill as the purchase price is greater than fair value. You do not amortize goodwill. It is subject to impairment review. If it is impaired then it would be written down. You do not write off goodwill. It is only impaired if the PV of the CFs for the Burger King reporting unit is less than the carrying value.
Edit: misunderstood what you were asking. My apologies.
It's unclear. You won't know if there's an impairment until you run a step 1 (goodwill impairment assessment). Goodwill yields cash flow. Just because you lose the trade name, it doesn't necessarily mean that the Company is worth less than its purchase price. Presumably, you're paying for something.
So again, you don't know if there's impairment until you conduct a goodwill impairment assessment.
You don't know if there's an impairment without first doing a step 1 (goodwill impairment assessment). It's not necessarily the case that the fair value of the reporting unit will be less than the carrying value without the trade name,. It seems likely, but it's not 100%.
You don't know if there's an impairment without first doing a step 1 (goodwill impairment assessment). It's not necessarily the case that the fair value of the reporting unit will be less than the carrying value without the trade name,. It seems likely, but it's not 100%.
Technically, you can never really write off goodwill, from an accounting stand point. At least that is what I'm aware of. When you do allocations of excess FV to the company your acquiring you need to add each account as FV of the parent to BV of the sub (company your acquiring).
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