Goodwill accounting: calculation, impairment and a Swiss example
Goodwill arises when a business acquisition leaves a residual amount beyond the identifiable net assets. Its calculation and subsequent treatment depend on the accounting framework. Understand the figures, avoid common confusions and assess the effect on a Swiss group’s accounts.
By Sarah Prieur · Swiss certified accountant
Goodwill: the essentials
Goodwill is a residual asset recognised in certain business acquisitions. In a straightforward 100% acquisition, it is the difference between the consideration transferred and the identifiable net assets recognised at the acquisition date.
- It is not simply the purchase price minus the target’s historical equity.
- A brand or customer relationship may be a separately identifiable asset.
- Under full IFRS, goodwill is not amortised; it is tested for impairment.
- Swiss GAAP FER allows different accounting treatments.
Goodwill is principally relevant to acquisition accounting and consolidated financial statements. It does not automatically measure the commercial value of every SME.
Why does goodwill arise in an acquisition?
A buyer may pay for expected synergies, an assembled workforce or opportunities it hopes to develop. Not all these benefits are recognised as separate assets. The remaining amount becomes goodwill when the transaction falls within the relevant acquisition accounting rules.
This does not mean every intangible item belongs in goodwill. Acquired technology, licences, brands and customer relationships may meet the criteria for separate recognition. Their valuation affects the residual goodwill amount.
For example, a group buying a service company should examine its customer contracts and technology, even if the target had never recognised them on its own balance sheet. Omitting that analysis can overstate goodwill and understate future amortisation of identifiable intangible assets.
Under IFRS 3, this analysis forms part of the acquisition method and allocation of the purchase price. It must precede treating the unexplained difference as goodwill.
How do you calculate goodwill?
For a 100% acquisition without a previously held interest or non-controlling interests, the simplified calculation is:
Goodwill = consideration transferred − identifiable net assets recognised.
Net assets are the identifiable assets less liabilities recognised under the applicable acquisition rules. Historical book values alone are therefore insufficient.
| Illustrative acquisition | Amount |
|---|---|
| Price for 100% of the acquired business | CHF 1,500,000 |
| Identifiable assets recognised | CHF 1,200,000 |
| Liabilities recognised, including tax effects | − CHF 400,000 |
| Identifiable net assets | CHF 800,000 |
| Goodwill | CHF 700,000 |
The CHF 1,500,000 price is assumed to represent the relevant consideration. In a real transaction, contingent consideration, deferred amounts and payments linked to continued employment need separate analysis.
Where control is acquired without buying all the shares, or through a staged acquisition, the IFRS calculation also includes non-controlling interests and, where relevant, the fair value of the previously held interest. Do not apply the simplified formula outside its assumptions.
A share purchase may appear as an investment in the buyer’s separate accounts. Goodwill arising on consolidation is a distinct concept. Our explanation of the balance sheet helps place these items in context.
IFRS, Swiss GAAP FER and US GAAP: different treatments
Always identify the reporting framework when discussing goodwill. A rule from one framework cannot automatically be applied in another.
| Framework | Key treatment |
|---|---|
| Full IFRS | No amortisation; impairment testing under IAS 36 |
| Swiss GAAP FER 30 | Capitalisation and amortisation, or offset against equity under the permitted policy and disclosure requirements |
| US GAAP | The general model does not amortise goodwill; alternatives are available to certain eligible private entities |
| Swiss statutory accounts | Assess the Code of Obligations and legal structure of the transaction; do not automatically import consolidated goodwill |
Under revised FER 30, effective for periods beginning in 2024, capitalised goodwill is amortised over its useful life, with a maximum of 20 years. If the useful life cannot be determined, the period is five years. Offsetting goodwill against equity requires disclosures about its theoretical effect under the alternative treatment.
Our article on Swiss GAAP FER explains the framework. The amortisation alternative available to certain US private companies also shows why saying “goodwill is never amortised” is too broad.
How is goodwill tested for impairment under IFRS?
Goodwill generally does not generate cash inflows independently. It is allocated to the cash-generating units, or groups of units, expected to benefit from the acquisition’s synergies.
Testing is required annually and additionally when impairment indicators arise. The carrying amount of the relevant unit is compared with its recoverable amount: the higher of value in use and fair value less costs of disposal.
In a simplified example, a unit has a carrying amount of CHF 2,400,000, including CHF 700,000 of goodwill. Its documented recoverable amount is CHF 2,150,000. An impairment loss of CHF 250,000 is recognised and allocated first to goodwill, subject to the applicable rules. Goodwill falls to CHF 450,000 in this example.
The charge reduces accounting profit without a new cash payment when the entry is posted. It nevertheless reflects weaker prospects for recovering the investment. Under IFRS, a goodwill impairment loss cannot later be reversed.
What happens when the price is below identifiable net assets?
A negative residual after allocation may indicate a bargain purchase, sometimes called “badwill”. First reassess the consideration, assets and liabilities: an omission or valuation error could explain the apparent gain.
Under IFRS, after the required reassessment, a confirmed bargain purchase gain is recognised immediately in profit or loss at the acquisition date. It cannot simply be spread over several years.
Using the same simplified assumptions, a CHF 650,000 purchase price for CHF 800,000 of identifiable net assets would produce a CHF 150,000 gain once the analysis is validated. That gain alone does not prove the acquisition is a good business decision. Funding needs, possible disputes and integration costs still matter.
Swiss GAAP FER treatment of negative goodwill differs from IFRS. Assess it under the group’s chosen policy without mixing frameworks.
What should you ask before and after buying a business?
Before signing, establish which assets will be recognised separately, which payments are variable and which assumptions support the price. After completion, compare performance with the acquisition plan.
Retain a file containing valuations, approved budgets, discount rates, growth assumptions and sensitivity analyses. Compare forecasts with actual results to understand differences.
Separate accounting monitoring from economic performance. Unchanged goodwill does not, by itself, demonstrate successful integration. Review cash generated, clients retained and synergies actually achieved. The differences between IFRS and US GAAP also matter when comparing groups.
Frequently asked questions
Can a company recognise goodwill it has created itself?
Internally generated goodwill is not recognised as an asset under IAS 38. A reputation developed by the business does not, on its own, justify a goodwill balance.
Does high goodwill mean the buyer overpaid?
Not necessarily. Examine the identifiable assets and expected synergies. A high amount calls for scrutiny of the assumptions but does not, by itself, prove overvaluation.
Can goodwill be amortised?
It depends on the framework. Full IFRS does not amortise goodwill. Swiss GAAP FER and certain US GAAP alternatives provide different treatments.
Can goodwill impairment be reversed under IFRS?
No. Even if prospects improve, IAS 36 prohibits reversing an earlier goodwill impairment loss.
Is goodwill tax-deductible in Switzerland?
The tax treatment depends on factors including the acquisition structure and the accounts concerned. Goodwill recognised on consolidation does not automatically create a Swiss tax deduction.
Sources
- IFRS Foundation: IFRS 3 Business Combinations: initial goodwill and bargain purchase gains.
- IFRS Foundation: IAS 36 Impairment of Assets: goodwill impairment and the prohibition on reversal.
- IFRS Foundation: IAS 38 Intangible Assets: identifiable intangible assets and internally generated goodwill.
- Swiss GAAP FER 30: goodwill accounting under the Swiss framework.
- FASB: ASU 2014-02: the amortisation alternative for eligible private entities.
