Why is self generated goodwill not recognized in the book of accounts?

Most of you have heard about Goodwill. Most of the entities recognise Goodwill in their Balance Sheet but you should be aware , that Goodwill is not self generated Goodwill. The Goodwill which we see in Balance Sheet is either Purchased Goodwill or Goodwill resultant from Business Combination. Now Question Comes why we do not recognize internally Generated goodwill in the books of Accounts. Let's Understand this in detailed :)

Which rules are Applied on Recognition of Goodwill?

  • Internationally it is covered by IAS-38
  • In India, We have Ind As-38  and AS-26.

What these Standards Says about recognition of Goodwill?

  •  IAS-38 & Ind AS-38 both have common views of it.
  • Goodwill is an intangible assets so we need to check the recognition criteria given for Intangible Assets.
  • As per Ind AS-38 and IAS-38 , to recognize an Intangible Asset, it has to meet two Criteria first Definition of Intangible Asset and when it meets the requirement of definition then secondarily Recognition Condition is to be tested.
  • Definition:- Intangible Assets are Identifiable , Non-Monetary Assets which is Without Physical Substance.
  • Self generated Goodwill fulfill the Definition Criteria and let's check whether it fulfill the Recognition Conditions

Recognition Conditions:- 
  1. Economic Benefits should flow to entity.
  2. Such benefits can be reliably measured.
  3. Cost can be measured reliably.
  • Self Generated Goodwill fails to meet recognition condition of Intangible as Cost of self generated CAN NOT be measured reliably. And this is why, we can not recognise in the books of Account. 
  • Internally Generated Goodwill Can not be recognize in the Books of Account.
  • Purchased Goodwill can be recognised.
  • Goodwill result out of Business Combination can be recognised.
!!!!! Happy Learning !!!!!!!

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