Accounting Treatment of Goodwill Change in PSR

The Accounting Treatment of Goodwill in purchase price allocation (PPA) is critical in financial reporting, particularly when businesses undergo mergers and acquisitions. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.

What is Goodwill?

Key Considerations in Goodwill Accounting

1. Impairment Testing : Goodwill is subject to impairment testing at least annually or whenever there is an indication that its carrying amount may exceed its recoverable amount. If impaired, goodwill is written down to its recoverable amount, which is the higher of its fair value, fewer costs to sell, or its value in use.
2. Changes in Purchase Price Allocation : Sometimes, after the initial recognition of goodwill, subsequent information may lead to changes in the fair values assigned to the acquired assets and liabilities. These changes can result from new information about the business acquired, adjustments to estimates, or reassessment of the fair value of assets.
3. Adjustments to Goodwill : If changes in the PPA affect the fair values of identifiable net assets, the goodwill initially recognised may need adjustment. For example, if an acquired asset's fair value is revised downwards, goodwill typically increases by a corresponding amount.

Journal Entries for Adjustments to Goodwill Accounting

Goodwill Accounting in Case of Admission of Partner

1. Valuation of Goodwill

2. Sharing of Goodwill

3. Admission of New Partner

4. Adjustments in Capital Accounts

Accounting treatment in case of the change in Profit Sharing Ratio (PSR)

• At the time when the profit-sharing ratio (PSR) of partners is changed
• When a new partner is being admitted.
• At the time of death or the retirement of a partner.
• The entire business is being sold.

• Average profit method
• Super profit method
• Capitalisation method