Intangible Assets:

Goodwill
 Goodwill
Goodwill arises when earnings exceed normal earnings by reason of
good name, capable staff and personnel, high credit standing,
reputation for fair dealings, reputation for superior products
favorable location and a list of regular customers.
 ◦ Goodwill that is generated
Developed
internally therefore is not
Goodwill
recorded.

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 ◦ Goodwill that has been paid for.
Purchased It arises when a business is
Goodwill purchased. Thus, it is recognized
as an asset.

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 1. Residual Approach
◦ Goodwill is measured by comparing the
purchase price for the entity with the
net tangible and identifiable assets.
Measurement of Net assets should be measured at fair
Goodwill value.

◦ Goodwill is the excess of the purchase

price over the fair value of net tangible
and identifiable assets.

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 Net Assets excluding goodwill 7,500,000
Normal rate of return 12%

Past earnings for 5 years preceding the scale:

2012 950,000
Illustration 2013 975,000
2014 950,000
2015 1,075,000
2016 1,050,000
Average earnings for the 5-
5,000,000
year period (5,000,000/5)
= 1,000,000

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 Average earnings 1,000,000
Normal earnings
(7,500,000 x .12) (900,000)

Method 1 – Average excess earnings 100,000

Purchase of
“average excess Goodwill
earnings”
(100,000 x 5) 500,000

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 The goodwill is measured at the average excess
earnings capitalized at 25%

Average excess earnings 100,000

Method 2 –
Capitalization of Divide by capitalization rate ÷ .25
“average excess
earnings” Goodwill 400,000

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 The goodwill is measured at average earnings
capitalized at 10%

Average earnings 1,000,000

Method 3 – Capitalization rate ÷ .10
Capitalization of
“average earnings”
Net assets, including goodwill 10,000,000
Less: net assets excluding goodwill (7,500,000)
Goodwill 2,500,000

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 If the average excess earnings of P100,000 are
expected to received annually in 5 years, the
goodwill assuming a discount rate of 12%

Method 4 – Average excess earnings 100,000

Present value Multiply by the PV of OA annuity
method of 1 for 5 years at 12% 3.605

Goodwill 360,500

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 ◦ If the purchase price or consideration
transferred for the entity is less than the net
fair value of the identifiable assets acquried
and liabilities assumed, the difference is
Negative negative goodwill.
Goodwill
◦ PFRS 3, paragraph 34 provides that such
negative goodwill is recognized in profit or loss
as “gain on bargain purchase”

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