The value of a company – goodwill versus negative goodwill
July 26, 2021
When does the negative goodwill arise?
A transaction frequently used in economic turnover is the acquisition of an enterprise or its organized part. As a result of such an operation, goodwill is disclosed. It is defined as the difference between a price to be paid for acquiring another business unit and a net fair value (market value) of acquired net assets. The company value reflects the state of a business activity that is conducted by a specific entity at a given moment. The goodwill, however, is not reflected in financial books of this entity. Goodwill does not materialize until the sale of a company. Depending on what financial effect ones deal with in the purchase transaction, positive or negative goodwill can be met. It which should be properly presented in buyer’s books of account.
POSITIVE GOODWILL when purchase price > net value of acquired assets
NEGATIVE GOODWILL when purchase price < net value of acquired assets
Goodwill valuation
An entity that takes over a given company makes a valuation of its value according to the following approach:
GOODWILL VALUATION = price of company – market valuation of assets and liabilities
where:
- PRICE OF COMPANY – – price paid for the company with goodwill, by the entity that made the acquisition
- MARKET VALUATION OF ASSETS AND LIABILITIES – net fair value of assets
- NET FAIR VALUE OF ASSETS – market valuation of assets – market valuation of liabilities.
Value of the company (goodwill) Position in the balance sheet Form of settlement Positive goodwill intangible assets Depreciation usually max. for a period of 5 years Negative goodwill accruals and deferred income Other operating income: - write-offs up to the amount not exceeding the fair value of acquired fixed assets, excluding long-term financial assets listed on regulated markets, over the period being the weighted average economic utility of the acquired and depreciable assets- write-offs in the amount exceeding the fair value of fixed assets, excluding long-term financial assets listed on regulated markets, to revenues as at a merger date.
Goodwill and tax aspects / income tax and vat
Sale of the enterprise
Pursuant to the CIT Act, if a company sells an enterprise for a price lower than a fair value of its net assets, resulting in negative goodwill, no tax obligation will arise. This position was also confirmed by the director of Krajowa Informacja Skarbowa in the interpretation of March 29, 2018 (0111-KDIB1-3.4010.71.2018.1.PC), where we read: “(…) when referring whether to assimilate the negative goodwill – arising from the sale of an entire enterprise – to the income or not, it should be pointed out that the concept of negative goodwill is only a balance sheet category and its recognition in the books of accounts does not result in direct tax effects (…). Thus, if a negative company value arises as a result of the sale of the enterprise, it will not be recognized as tax revenue.” Moreover, it should be noted that the sale of an enterprise or its part is also exempt from VAT (Article 6 (1) of the VAT Act).
In the case of sale of an enterprise at a price higher than the net fair value of assets. This information can be found in the judgment of the Supreme Administrative Court of October 8, 2019, ref. II FSK 3272/17, goodwill is not a property law. The company value cannot be sold and therefore there are no grounds for taxing PCC.
Acquisition of an enterprise
If the purchase price of an enterprise is determined at a level higher than the market value of the assets included in it, a buyer will be able to depreciate the surplus and include write-offs in tax costs. However, this period should not be shorter than 60 months (Art. 1 point 4 of the CIT Act)
Positive goodwill under the CIT Act is defined in art. 16 g of paragraph 1. 10 point 1 of the Act,
and determined in accordance with Art. 16 g of paragraph 1. 2 of the Act.
Income tax regulations do not mention the issue of tax recognition of negative company value at all. Moreover, this value does not constitute tax income.
Autor: Beata Dymkowska
