Module IV BUSINESS COMBINATION.pdf - ACCOUNTING FOR...

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ACCOUNTING FOR BUSINESS COMBINATIONSpecial accounting topics for business combinationGoodwillOnly a goodwill that arises from a business combination is recognized as an asset.Goodwill arising from other sources (e.g internally generated) is not recognized.Goodwill is measured and recognized on acquisition date. Subsequent expenditures onmaintaining goodwill are expensed immediately.After initial recognition, goodwill is not amortized but rather tested for impairment atleast annually. For this purpose, goodwill is allocated to each of the acquirer’scash-generating units (CGU) in the year of business combination. If the allocation is notcompleted by the end of the year, it must be completed before the end of theimmediately following year.Cash-generating units (CGU) is “the smallest identifiable group of assets thatgenerates cash inflows that are largely independent of the cash inflows fromother assets or groups of assets”.Goodwill is allocated to the CGUs expected to benefit from the synergies of thebusiness combination using a methodology that is reasonable, supportable, and appliedin a consistent manner. For example, goodwill may be allocated bsed on the relative fairvalues of the CGUs.Because goodwill is unidentifiable, it cannot be tested for impairment separately butonly in conjunction with groups of assets that generate independent cash inflows.Goodwill does not generate cash flows on its own but contributes on the cash flows ofCGUs.A CGU to which goodwill has been allocated is tested for impairment annually. A CGU isimpaired if its recoverable amount is less than its carrying amount including theallocated goodwill. Impairment loss is charged first to the CGU’s goodwill and any

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