Accounting aspects of the purchase of commercial plant – goodwill versus valuation difference

Oct. 29, 2021 Czech Republic

In accounting practice, we may encounter a business transaction in which one company acquires for payment from another company an entire commercial plant or only a selected part of it.

In this case, this is not an acquisition of the company, but a transfer of ownership of an individual asset and liability components.

When purchasing a commercial plant, specific asset and liability components are taken over and incorporated into the buyer's accounting. The latter may decide how to value the newly acquired assets and liabilities, which has implications for accounting and financial reporting.

The determination of the purchase price constitutes a separate chapter. In the case of unrelated entities, this can be set at virtually any amount, depending only on mutual agreement between the parties. It is very often common practice for an expert opinion to be prepared; which serves as a springboard for determining the price.

In an ideal world, the whole transaction would take place in one of two ways. Prior to the purchase of the commercial plant, an expert opinion would be prepared, which would be used to value the individual asset and liability components being passed to the buyer upon purchase, and the subsequent purchase price would exactly match this valuation. At that moment, the buyer would merely include the individual components in his accounting on the date of purchase against the Other Liabilities account, and payment of the purchase price would be the final settlement. The second option would be to set the purchase price exactly at the residual book value, which would then be transferred to the buyer's accounting.

In the real world, such situations rarely occur and the purchase price differs from the above valuation for both objective and subjective reasons. At this point, goodwill or a valuation difference arises on the part of the buyer, the depreciation of which affects the entity's profit or loss over the next few accounting periods.

If there is no expert opinion, then the buyer has no choice but to accept the values from the seller's accounting and include exactly this amount in its own accounting. The difference between the purchase price and the assets and liabilities taken over on the part of the buyer is then the valuation difference (reported as tangible fixed assets), which the entity then depreciates over 180 months. Only if when acquiring assets with a useful life of fewer than 15 years can the entity depreciate the valuation difference over a shorter period. At the moment of disposal of the last asset acquired through this purchase, the remaining part of the undepreciated valuation difference will also be eliminated.

In the case of the existence of an expert opinion, assess the individual asset and liability components, the buyer may choose from two options. It may proceed in the same way as in the previous case, or it may incorporate the individual asset and liability components into its accounts in accordance with this opinion. The difference between the purchase price and the values given in the expert opinion then forms goodwill (reported as intangible fixed assets, regardless of their amount), which the entity then depreciates over 60 months. In the case of disposal of the last asset acquired through this purchase the remaining part of the undepreciated goodwill will be eliminated.

As can be seen from the above, the valuation decision when buying a commercial plant subsequently affects a company's profit (negatively or positively, depending on whether the purchase price was higher or lower than the valuation of the assets acquired) – 5 years in the case of goodwill or 15 years in the case of a valuation difference. It depends only on the specific situation whether it is more advantageous for a company to account for goodwill or a valuation difference if all the conditions stipulated by law are met and the company, therefore, has a choice.

Lucie Nováková
Lucie Nováková Senior Accountant
ASB Czech Republic
lnovakova@asbgroup.eu