Why do you add existing goodwill to calculate goodwill in an acquisition?
In an acquisition you calculate the pro forma goodwill as Eqty Purchase Price - BV of Equity - Write-ups + DTL (from write up) + Existing Goodwill
The new goodwill represents the new excess purchase price, but then I'm confused why do we have to add the old goodwill? Confused about that.
E.g. if we purchase a company for 2000, it's current BV of Eqty is 1500, and current GW is 1000 and let's assume no write ups. It makes more sense to me that the new goodwill should just be 1500 (Purchase price - BVE) but why do we have to add the existing GW?
bump also want to know
bump also interested
The old goodwill is automatically "written-off" and basically added back as part of the new goodwill. So the "new" goodwill created is really just 1500, but "formally" the goodwill created is 1500+1000
Let's say you had no PP&E write-ups or intangible assets created in a transaction. Then the Purchase Equity Price - Book Value of Target = Purchase Premium = Goodwill. If the target had any goodwill, the entire amount will be written-off due to accounting rules and this would create a gap in the combined company's balance sheet. We're wiping out something from the Asset side of the combined B/S due to accounting rules. Therefore, we need to plug that gap (add the "write-off amount of existing goodwill") in calculating our premium allocable. Hope this makes sense.
Bump, anyone have another explanation?
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