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Negative Goodwill | Know if it is Good or Bad? (with Examples) - YouTube
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clicking the bell icon Friends today we are
going to learn a concept that is a
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tutorial on negative goodwill whether it
is good or bad then that is what
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something we are going to discuss over
here as you can see there is a example
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over here of Aareal Bank which completes a $350 million dollar westlmmo
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acquisition if you go down over here
there is an article over here which is
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written that it will Aareal Bank completes and the written in a statement of Areal say
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that the transaction creates added value
for the Aareal bank from the very
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beginning partly with the negative
goodwill approximately close enough to
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150 million recorded upon the closing
recorded upon the closing of the deal in
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addition to the one of that effect the
transaction will make a positive
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contribution to the Aareal bank group of a
consolidated operating profit so after
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reading this we have couple of fir
things that are coming in into are paying
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so let's get into the nitty-gritty of the
same the very first thing what exactly
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is negative goodwill
so we have heard about goodwill a lot we
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have heard about goodwill a lot right so
it is an additional business pull you
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know basically which an entity enjoys
due to a relation with the customer okay
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it matters a lot standing in the market
known the quality of the product and
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services etc so it may amend it from the
proprietary technology or patent or it
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is holding and then intellectual
property right it holds and so on and so
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forth see an entity which is having a
goodwill will basically be capable of
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generating more business with less input
so it's like if you have more in more
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goodwill then in that scenario with less
efforts you can generate more output
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more output means more sales and so on
and so forth as compared to the
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competitors with lesser goodwill or no
goodwill in case of lesser it
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is going to be the vise versus other
case okay now you have heard about
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have you I mean my question is that have
you heard about negative goodwill if
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not I mean does it mean a bad reputation
or something have you seen any entity
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who is losing business due to its brand
or its negative goodwill well it's not
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so the negative goodwill literally does
not mean that at all now what we learned
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in our example over here we note over
here then from the above the Aareal Bank
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they completed the acquisition of West
westlmmo that was euros of 350 million
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acquiring a euro 4.3 billion performing
European commercial real estate loan
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book so this transaction added value to
the Aareal Bank as 150 million euro and
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was record recorded as negative goodwill
which we just saw round about here upon
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basically closing the deal so basically
in this to tutorial we look at what is
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negative goodwill and how does it adds
value okay
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so that's what we are going to get into
the details
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now first and foremost thing my first
thing is what is negative goodwill what
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is negative goodwill so that is my first
and the foremost calculation or
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something conceptual which I'm going to
talk about see negative goodwill is
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termed as coined in the context of one
company that is taking over the another
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let's say that is company and then
they'll say Company B so a is taking
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over B and it's it's a gain basically
occurring to a former when the
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consideration is paid for an acquisition
let's say a is selling to be okay so
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what is the goodwill that should be
calculated for a so basically it is
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again the gain occurring to the a when
the consideration is paid for the
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acquisition to be for the acquisition
and is less than the fair market value
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of its net tangible assets in literal
term negative goodwill implies a bargain
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purchase very important this is now the
important aspect to ponder here is that
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why would someone be willing to sell the
entity's assets below its fair market
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value it is as simple as that
why would some would be ready to do
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something like that well any wise person
would think that the assets can be
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disposed off at a fair market price and
then why and why question for negative
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goodwill will arise in the very first
place so well let's look into this see
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there may be circumstances when which
may force such a situation the fourth
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situation namely is force or distressed
sell forced or distressed sell that can
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be the first and the foremost thing the
second very important over here
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recognition of measurement exception for
particular item which is discussed in I
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IFRS three that is the international
financial reporting standard third any
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error basically in you can say in the
valuations of assets or and controlling
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or non-controlling interest in any
entity so that can be one of the reason
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say negative goodwill is basically is a
gain for acquirer entity who is the
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acquire over here B is acquirer and a is
a acquire is acquirer and B is acquired
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so negative goodwill is a gain for an
acquirer entity and should be recognized
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okay
for a recognized in its or books but
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before that acquirer must basically a
over here must review that the
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calculation to ensure that everything is
arithmetic correct now there is even
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basically there should not be any
mistake made in the calculation of
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various element as negative goodwill
basically does not arise normally so
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after all buying a business costlier
than the market price being in a notion
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that we have acquired the same at a
profit is not a wise idea so once it is
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confirmed that the net result is gain
that is gained on acquisition once we
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have confirmed that there is a gain on
acquisition the resulting gain should be
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recognized in the books of accounts that
is in the profit and loss account of the
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acquirer that is a any change in the
management or control of the company you
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know of valuation of the asset must be
performed according to the general
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accepted accounting principle which is
known as GAAP okay see this this
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exercise is commonly referred to as you
know purchase price allocation PPA that
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is purchase price a location C this is
called so because the purchase price of
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the acquired company over here the
acquired is which company's been
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acquired a okay so the acquired company
over here the value of the acquired
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company over here is greater than the
value of the acquired assets so this may
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also be understood as the whole company
is greater than the sum of its parts so
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then the additional value of the whole
company over and above is referred to as
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goodwill as simple as that
so there are certain transaction in
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which the total value of the parts put
together as an individual assets
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acquired in the transaction it exceeds
the price paid for the total company
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okay so this is commonly known as
bargain purchase now the next thing the
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positive goodwill example if we go for
the next most important thing that we
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are going to discuss is positive a
goodwill now to understand the negative
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goodwill you know it's helpful to
understand the positive good feel
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beforehand okay so in a typical
acquisition scenario that was in our
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case of AB
you know acquired tangible assets
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include like you know your debtors and
then you have your inventory that is
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your stock you have fixed assets and so
on and so forth okay machineries planted
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machineries and so on and so forth so
there may be number of intentional
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assets in addition to the tangible
assets which form a part of the
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acquisitions and are seen as a value
drivers so this intangible assets
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basically all goodwill in any patent
copyright trademark can be a brand name
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can be a patent or certain technology
but can be license positive customer
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relationships having capability to have
an additional business pool this is some
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of the intangible assets so to pass the
test of the allocation it is mandatory
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that there must be a legal enforceable
contract to use this assets in the favor
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of the acquirer company that is in our
case of a okay so after a lock or
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locating the value of all these assets
any exist amount left over is considered
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as positive goodwill I hope you got the
idea regarding how things will worked
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out so let's see the example on how
things are work out in case of goodwill
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now this is an example as you can see
this example will show the purchase
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price allocation for 5 million
acquisition so we have receivables over
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here we have plant and machinery over
here land and building data there are
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some intangible assets like patent and
trademark we have unallocated intangible
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assets like goodwill and purchase
consideration okay so basically what we
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can see from the above that the fair
value of the assets which has been taken
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over over here is close enough to 4.2
billion dollar that is USD 4.2 billion
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million dollar which effectively
means that the price paid over and above
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the fair value of the asset is positive
goodwill that is close enough to 0.8
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now you have got the idea regarding the
positive goodwill let's see some example
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on negative goodwill see most of the
time when you know business purchase
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basically see basically what you just
saw purchase consideration is how much
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as you can see 50 that is 5 million
right and the goodwill is 8,00,000 so the
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difference is going to be your assets
okay so basically your assets unless
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your purchase consideration is going to
give you a balance in figure and that
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balance in figure is your goodwill now
let's see some negative goodwill example
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see when most of the time business
acquisition transaction happened would
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result in positive goodwill there may be
some instances where the fair value of
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the assets that have been taken over is
more than the price paid for the
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acquisition there's a scenario typically
results into negative code fill and
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generally it is termed as we just
discussed known as bargain purchase so
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using the same example used in this
particular scenario if the purchase
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price of the deal let's say over here is
4 million instead of 5 million instead
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of 5 million net set is 4 million so the
purchase allocation would be somewhat
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like this as you can see all of the
details remaining the same your complete
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assets that is your tangible assets then
you have intangible assets it will
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remain the same the only changes is your
purchase consideration so when your
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purchase consideration has been changed
to 4 million what do you see your
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goodwill goes negative
so you're deducting 4 million from all
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this total so you basically this total
is greater than your purchase
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consideration then in that same scenario
goodwill will be negative if we revise
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again we say that if all this value of
the asset if that is less than the
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purchase consideration that amounts to
positive goodwill I hope you got the
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idea now this type of scenario basically
calls in additional analysis ok
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that we will look shortly see there are
some signs you know which gives a
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negative goodwill idea see there are
several indication which suggests that
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you know the transaction may may be
bargain purchased so some indication sign
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of bargain purchase included like you
know the acquired you can say the
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acquired company has incurred a
financial losses and in the recent past
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or has been
in debt and is not able to service its
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debt the second is that the net book
value the nbv the net book value of the
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assets taken over is more than the
purchase consideration that has been
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paid okay the third that can be that the
transaction has been carried out
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secretly and possibility of the higher
value is not been explored so you can
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see over here I can write secretly the
transaction has been taken and conducted
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secretly the fourth thing is that you
know the a single bidder has taken
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advantage of the situation and the
absence of the in absence of the other
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bidder so I'll just write single bit
over here as a pond as a part of the
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PowerPoint the deal fifth one the deal
has been finalized in a very haste
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situation or in a haste condition within
a very short span of time
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that can also lead to negative the
seller was compelled to sell the
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business against his will or in a
desperate situation then that can happen
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the seventh one is that the existence of
the very fact that the acquirer has more
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knowledge of the acquired business so
there should be a very strong reason as
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to why the transaction is a bargain
transaction and and the same should be
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documented properly as to why a bargain
purchases represented you the fair
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market value of the assets taken over so
if the purchase price allocation cannot
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be articulated precisely as to why the
purchase price location should be should
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have negative goodwill this will call
for a revaluation of the fair value of
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each and every assets so in the absence
of the above
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based you can see over here it may be
concluded that the fair value of the
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overall business
is more than the value of the photos
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consideration that is a purchase price
this means simply means that the
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transaction did not happen at the fair
value in such a situation the concluded
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fair value is the amount allocated to
the acquired assets and any excess
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amount or and about the fair value of
the business would be treated as
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extraordinary gains so finally to make a
final conclusion on the about the prime
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most implication of the bargain purchase
is that the gain of the buyer if it is a
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purchase below the fair value of the
acquire assets a bargain purchase gain
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should be recognized at the time of the
acquisitions and recorded as
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extra-ordinary item extra-ordinary for
income basically extraordinary income so
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that is at the basically the date of
acquisition and however it is important
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to note that this is again for a purpose
of accounting or accounting only so this
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would not in no way to be included in the
calculation of income subject to taxes
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so that's it for this particular topic
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