The Company implements various strategies, including the acquisition of other businesses, with a focus on maximizing profits and enhancing its operations. Accounting goodwill plays a significant role in these acquisition processes. When the Company acquires ownership of another business while allowing it to operate independently, accounting goodwill comes into play. This strategy enables the Company to expand its business, foster growth, mitigate excess capacity and competition, and gain access to innovative technologies.
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For startup companies, acquisitions can occur because of the need to increase capital reserves in anticipation of a national and/or global economic slowdown. In addition, the moment of rising commodity prices can also trigger acquisitions for mining and plantation sector companies in order to strengthen their business expansion. One example of a company making an acquisition is PT XL Axiata which acquired PT Link Net. Quoted in IDX Channel, in June 2022, Axiata Group Berhad and XL Axiata completed the process of acquiring 66.03% of Link Net (LINK) shares with a value of MYR 2.63 billion or around IDR 8.72 trillion. This acquisition process is part of XL’s efforts to expand the provision of digital services and convergence for the community.
Understanding Goodwill in Business Combinations
Generally the acquisition process results in the recognition of an intangible asset called goodwill. Based on PSAK 22 “Business Combinations”, goodwill is an asset that represents future economic benefits arising from other assets acquired in a business combination that cannot be individually identified and separately recognized. Goodwill occurs when a company buys at a higher price than the company’s value. The acquirer company buys at a higher price on the basis that the company has advantages such as in terms of business reputation, brand or managerial talent.
Recognition and Measurement of Goodwill
Goodwill is recognized by the acquisition method. The acquirer must determine the acquisition date, which is the date on which the acquirer obtains control of the acquiree. The acquisition date or closing date is generally the date the acquirer legally transfers consideration, acquires assets and assumes the acquiree’s liabilities. At the acquisition date, the acquirer recognizes the identifiable assets acquired, liabilities assumed and the non-controlling interest of the acquiree. Recognition is separate from goodwill.
Measuring Goodwill at Fair Value
In principle, goodwill is measured at fair value at the acquisition date. For each business combination, the acquirer measures at the acquisition date the component of the non-controlling interest in the acquiree that represents a present interest and entitles it to a proportionate share of the Company’s net assets in the event of liquidation at fair value or a proportionate share of the existing ownership instruments at a fixed amount. Recognized on the identifiable net assets of the acquiree.
The fair market value of assets and liabilities refers to the amount that a company or property would sell on the open market. This value is the result of the most accurate assessment of the company’s assets and liabilities, which are included in the fair market value of a tangible and easily identifiable asset and are based on current market value.
Impairment Testing for Goodwill
Goodwill is an intangible asset that has an unlimited useful life, but PSAK 48 requires companies to assess whether there is an indication of an impaired asset at the end of each reporting period. If any such indication exists, then the Company must estimate the recoverable amount of the asset. An asset will be impaired if it carrying amount exceeds its recoverable amount.
Presentation and Disclosure of Goodwill in Financial Statements
Impairment testing can be performed at any time during an annual period provided it is performed at the same time each year. For impairment purposes, goodwill acquired in a business combination is allocated from the acquisition date to each of the acquirer’s cash-generating units, or groups of cash-generating units that are expected to benefit from the synergies of the business combination, regardless of whether other assets or liabilities of the acquiree are assigned to unit or group of units.
Each unit or group of units to which goodwill is allocated must represent the lowest level within the entity whose goodwill is monitored for internal purposes and is no larger than the pre-combination operating segment. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from another asset or group of assets. Cash-generating units that have received goodwill allocations are tested for impairment on an annual basis, and whenever there is an indication that the unit is impaired by comparing the unit’s carrying amount with its recoverable amount.
If the recoverable amount exceeds the carrying amount, then the units and goodwill allocated to those units are deemed not to be impaired. However, if the carrying amount of the unit exceeds the recoverable amount, then the entity recognizes an impairment loss.
Presentation and Disclosure in Financial Statements
A transaction that occurs must be presented and disclosed in financial statements in accordance with applicable standards, so that users of financial statements can use this information to make decisions. Therefore, acquisition transactions carried out by a company as well as the emergence of goodwill must be presented and disclosed in the financial statements in accordance with applicable standards.
Disclosure of Financial Effects in Business Combinations
According to PSAK 22, an acquirer discloses information that enables users of financial statements to evaluate the nature and financial effects of business combinations that occurred during the current reporting period and after the end of the reporting period but before the date the financial statements are authorized for issue. The acquirer discloses information that enables users of its financial statements to evaluate the financial effect of adjustments recognized in the current reporting period that relate to business combinations that occurred in that or prior reporting periods.
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