Accounting for a goodwill

Accounting for a goodwill

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The goodwill is a residual element of the goodwill and includes, in accounting, the elements that could not be accounted for in other asset items.

Goodwill is recognized in account 207 Goodwill before being subject to either amortization or annual impairment tests.

The goodwill , or rather the goodwill, an intangible element of the fund, only exists in the accounts of a company following an acquisition.

The reason for this absence in new companies is explained by the fact that it is very difficult to distinguish the creation of a goodwill from the development of an activity as a whole.

Only an acquisition or sale of the goodwill according to the provisions of articles L141-1 and following of the commercial code will have repercussions in accounting. You need a deed of transfer with a certain number of mandatory information, possibly preceded by a promise of sale.

The rules relating to the amortization of goodwill in accounting and taxation are discussed in the article “ Amortization and goodwill: the essentials ”.

As a reminder, for tax purposes, in principle, can only be depreciated, they are not depreciable and the amortization recorded must then be reintegrated. However, on a temporary basis, funds acquired between January 1, 2022 and December 31, 2025 may be amortized for tax purposes.

The concept of goodwill is broader than that of goodwill. The first is a universality. In the context of a commercial or industrial activity, the elements of the fund include in particular: the right to the lease, the clientele, the trade name, the equipment, the furniture and more generally, all the elements necessary for the activity. The second is obtained by difference, after having recorded on the assets side of the balance sheet, all the elements that can be valued and accounted for separately.

The recognition criteria for goodwill and goodwill

If account 207 “goodwill” is used, it is because it was acquired from a third party and because the sale price (which appears in the deed of sale) could not be entirely assigned to other asset items (inventory, fixed assets, etc.).

Otherwise, even if there is a goodwill, its value will not appear. This is what article 212-3 of the PCG recalls, when it specifies that the creation of a goodwill is inseparable from the cost of developing the activity as a whole:

acquired which are not subject to a separate assessment and recognitionin the balance sheet and which contribute to the maintenance and development of the business potential of Expenses incurred to create in-house goodwill, brands, newspaper and magazine titles, customer lists and other substantially similar items cannot be distinguished from the cost of developing the business as a whole. together.

Goodwill is made up of a number of tangible and intangible elements that appear in separate accounts. Thus, account 207 “goodwill” is supplied by difference.

Accounting for the acquisition of a goodwill

When a company acquires a goodwill, the various elements that make it up are allocated to the items (assets) concerned.

It is the sales contract that lists these different elements. It also gives an evaluation when possible.If the transfer is made for an overall price, the entry cost of each of the assets that make up this universality on the legal level depends on the value attributable to each of the assets. In the absence of a reliable valuation of each of the goods, the company uses the market value. This is also the case when in practice (in small companies), the transfer contract mentions an overall price for the intangible elements and another overall price for the tangible elements (equipment, furniture, etc.).

Example of accounting for an acquired goodwill

A company acquires a goodwill for a total of €100,000. The resale value, net of inventory distribution costs, is estimated at €10,000.The overall resale value of used equipment is set at €15,000. No other element can be assessed separately. The right to the lease is valued at €10,000.

Acquisition of a goodwill: example of accounting

To record the sale price, account 775 Sale price of assets subdivided for tangible and intangible fixed assets is credited and the cash account on which this sum was collected is debited. To show the capital gain, it is then necessary to take out of the balance sheet, all the elements taken over by the purchaser. The net book value appears in accounts 675.

This is potentially the case for the right to lease, patents, stocks, equipment and more generally, everything that is necessary for operation and has not been incorporated into the walls.

As with the purchaser, the various identifiable and separable elements are valued to enable the removal of fixed assets, the allocation of the overall sale price and the calculation of the capital gain (taxable or not depending on the case).

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