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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Zenith Traders Ltd absorbed Orbit Supplies Ltd in an amalgamation in the nature of purchase and recorded goodwill of ₹7,50,000 on amalgamation. The company's management has no evidence that the goodwill will benefit the business for more than a short period. Under AS 14, how should the goodwill be treated?

Goodwill arising on an amalgamation in the nature of purchase is amortised to income systematically over its useful life. AS 14 presumes this period will not exceed five years, unless a somewhat longer period can be justified. It is neither carried indefinitely nor written off against securities premium.

  1. ARetained permanently in the balance sheet without amortisation, subject only to impairment
  2. BAmortised to income on a systematic basis over its useful life, normally not exceeding five years unless a longer period can be justifiedCorrect
  3. CWritten off immediately against the securities premium account in the year of amalgamation
  4. DAmortised equally over ten years as the standard fixed period for all goodwill

Explanation

AS 14 requires goodwill arising on amalgamation in the nature of purchase to be amortised to income on a systematic basis over its useful life. The standard presumes a period not exceeding five years unless a somewhat longer period is justified. Permanent retention and a fixed ten-year rule are not provided in AS 14.

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