Purchase price of a company and goodwill

Valuing the business

1. Start from the vendor's statement of financial position.

2. Revalue each asset and liability to its fair value (for example property up, inventory and receivables down if some are obsolete or doubtful).

3. Exclude any assets or liabilities the purchaser is not taking over.

4. Fair value of net assets = revalued assets taken over - liabilities taken over.

Examiners note that in the vendor's own Realisation account assets still leave at book value; the revaluation matters for the purchaser.

The purchase price

The offer is often expressed per vendor share, for example '5 shares in the purchaser for every 4 shares held, plus £0.20 cash per share'.

Purchase consideration = (number of purchaser shares issued x their market value) + cash paid.

Watch the units: do not drop the final zeros when the figures are in £000 (a common error).

Goodwill

Goodwill = purchase consideration - fair value of net assets acquired.

It is paid for things not on the statement of financial position: reputation, customer base, skilled staff, location.

Treatment (IFRS 3 and IAS 36):

• purchased goodwill is shown as an intangible non-current asset
• it is not amortised, but is tested for impairment each year and written down if its value has fallen
• internally generated goodwill is never recognised
• if the price is below the fair value of net assets (negative goodwill, a 'bargain purchase'), the difference is recognised as a gain in profit after the values have been rechecked.

Worked valuation

Avon plc buys Severn Ltd (800,000 £1 shares). Offer: 5 Avon £1 shares (market value £1.60) for every 4 Severn shares, plus £0.20 cash per Severn share.

Severn Ltd: valuation of net assets

Worked example

Using the valuation above, calculate the purchase consideration and goodwill.

1. Avon shares issued = 800,000 x 5/4 = 1,000,000
2. Value of shares = 1,000,000 x £1.60 = £1,600,000
3. Cash = 800,000 x £0.20 = £160,000
4. Purchase consideration = £1,760,000
5. Goodwill = 1,760,000 - 1,480,000 = £280,000

Answer: Purchase consideration £1,760,000; goodwill £280,000

Check yourself

1. A vendor's assets have a fair value of £2,350,000 and the purchaser takes over liabilities of £610,000. Calculate the fair value of the net assets acquired.
   Show answer

   £1740000. 2,350,000 - 610,000 = £1,740,000.

2. A purchaser offers 3 of its shares (market value £2.50) for every 2 shares in the vendor, which has 600,000 shares. No cash is paid. Calculate the purchase consideration.
   Show answer

   £2250000. Shares issued = 900,000; value = 900,000 x 2.50 = £2,250,000.

3. The purchase consideration is £3,200,000 and the fair value of net assets acquired is £2,740,000. Calculate goodwill.
   Show answer

   £460000. 3,200,000 - 2,740,000 = £460,000.

4. A vendor has 2,000,000 shares. The offer is 1 purchaser share (market value £3.00) plus £0.75 cash for each vendor share. Net assets at fair value are £6,800,000. Calculate goodwill.
   Show answer

   £700000. Consideration = 2,000,000 x 3.75 = £7,500,000; goodwill = 7,500,000 - 6,800,000 = £700,000.

5. How is purchased goodwill treated after acquisition under IFRS?
   • Written off to retained earnings immediately
   • Amortised over five years
   • Added to the share premium account
   • Shown as an intangible non-current asset and tested for impairment each year
   Show answer

   Shown as an intangible non-current asset and tested for impairment each year. IFRS 3 and IAS 36: no amortisation; annual impairment test.

6. A company believes its own brand is worth £5 million. Why is this not shown as goodwill?
   • Goodwill can only be shown by sole traders
   • Internally generated goodwill cannot be recognised
   • The brand must first be amortised
   • Goodwill is always shown at zero
   Show answer

   Internally generated goodwill cannot be recognised. Only purchased goodwill, measured by a real transaction, is recognised.

7. A purchaser pays £900,000 for net assets with a fair value of £1,000,000. How is the £100,000 treated?
   • As positive goodwill of £100,000
   • As a liability
   • Added to share capital
   • As a gain on a bargain purchase in profit, after checking the values
   Show answer

   As a gain on a bargain purchase in profit, after checking the values. Negative goodwill is recognised as a gain once the fair values have been reassessed.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (XAC11/YAC11), Issue 2
• Pearson Edexcel IAL Accounting WAC12 Unit 2 mark scheme, June 2022
• Pearson Edexcel IAL Accounting WAC12 examiners' report, June 2025

Last updated 8 November 2026. Spotted a mistake? Tell us.