As we close the 2017 fiscal year, let's examine the topic of Goodwill in Italy and its application to financial statements following changes to the national accounting principle, OIC 24.
Goodwill1 is defined as the capacity of an undertaking to generate profits to a greater extent than normal, ie., the higher value achieved by its assets as a whole compared with the sum of the values of each individual asset, by virtue of the organisation of the goods and/or services in a process that is efficient and able to generate profits.
Goodwill can be generated internally or can be acquired for consideration, following the acquisition of an undertaking or equity investment, the transfer of a business or business line, a merger or demerger.
Goodwill is the difference between the price paid to acquire the business and the current value of its assets and liabilities.
The Italian Civil Code mentions
goodwill under Article 2426 (1), sub-indent 6),
with special regard to its recognition in the financial statements
and its amortisation, as follows:
6) Goodwill can be recognised under assets with the consent of the Board of Statutory Auditors, if appointed, if purchased, within the limit of the price paid. Amortisation of goodwill is effected over its useful life; in exceptional cases, where its useful life cannot be reliably estimated, goodwill is amortised over a period of ten years at the most.
A description of the goodwill amortisation period should be given in the Notes to the Financial Statements.
The OIC (Organismo Italiano di Contabilità – Italian Accounting Standard Setter) defines 'goodwill' in document no. 24, 'Intangible Fixed Assets': goodwill can be recognised under the intangible fixed assets only if the following conditions are simultaneously satisfied:
- it has been purchased (ie., derives from the acquisition of a business or business line or from transfer, merger or demerger)
- it has a quantifiable value corresponding to the price paid
- it is originally composed of charges and costs with deferred usefulness over time, which therefore assure economic benefits in the future (eg., generation of profits in the future)
- the principle of the recoverability of the related cost is respected (hence, it is not a 'bad deal').
Internally generated goodwill does not meet the requirements listed above and therefore cannot be capitalised in intangible fixed assets.
The recoverability of goodwill must be annually tested; if an impairment loss has to be recognised on goodwill and later the reasons that had justified it no longer apply, the impairment loss cannot be recovered (Article 2426 (1), no. 3, Italian Civil Code).
The accounting standard expressly provides that the goodwill be amortised according to its useful economic life defined at the time of its initial recognition and cannot be modified in the following fiscal years. For the purpose of the estimate of the goodwill useful life, companies should consider the available information to estimate the period within which it is likely that the economic benefits linked to the goodwill will occur.
In exceptional cases, where its useful life cannot be reliably estimated, goodwill is amortised over a period of ten years at the most. Where the application of specific elements determines an estimate of the goodwill useful life of more than 10 years, objective facts and circumstances need to corroborate this estimate. In any case, the useful life of goodwill cannot exceed 20 years.
1) GOODWILL recording
Assuming the purchase of company as per Notarial Deed of...... registered in.......
OTHER (debit) to PAYABLES TO SUPPLIERS (credit) 1,000,000
PURCHASES ACCOUNT from TRANSFER 700,000
2) AMORTISATION OF GOODWILL
In regard to the above goodwill, assuming its amortisation over 5 years on a straight-line basis, the relevant amortisation for the year is indicated below.
AMORTISATION OF GOODWILL3 (debit) to GOODWILL AMORTISATION FUND4 (credit) 20,000
3) CLOSING OF GOODWILL ACCOUNT DUE TO END OF AMORTISATION PERIOD
On completion of the amortisation process, the following entry should be made:
GOODWILL AMORTISATION FUND (debit) to GOODWILL (credit) 100,000
Once the goodwill amortisation process has ended, it is appropriate to enter in the accounts the closing of the goodwill account (as indicated above, if the indirect method is applied) as a multiyear cost whose "usefulness" has run its course and that, by nature, cannot be sold to third parties.
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1 See OIC (Organismo Italiano di Contabilità - Italian Accounting Standard Setter) Accounting Standards, Doc. no. 24 Intangible fixed assets.
2 Balance Sheet: B) Fixed assets I) Intangible fixed assets 5) Goodwill.
3 Income statement: B) Cost of production 10) Amortisation and depreciation A) Amortisation of intangible fixed assets.
4 Balance Sheet: B) Fixed assets I) Intangible fixed assets 5) Goodwill.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.