Accounting for Goodwill and Financial Asset Transfers

Goodwill and Financial Asset Recognition

Goodwill (Crédito Mercantil) represents the prepayment of future economic benefits derived from an acquired entity that are not individually identifiable and recognizable. For an estimate to be reliable in recognizing it as an asset in the financial statements, the existence of a transaction is essential. The NIF (Normas de Información Financiera) requires that it must have been acquired for consideration in a business combination.

Measurement and Impairment of Goodwill

The most relevant issue in the treatment of goodwill as an asset is its measurement—first, its existence at the time of purchase, and thereafter, its impairment. If it loses value, a loss must be recognized. The NIIF (IFRS) does not require amortization of goodwill as long as anticipated cash flows have not disappeared, but it mandates that it will be analyzed annually to ensure its effectiveness. The initial recognition and annual impairment review require careful analysis of the top market position for which the acquiring entity pays the vendor, and whether that position still exists at the time of analysis.

Transfers of Financial Assets

Regarding transfers of financial assets previously recognized: transactions regarding financial assets require that the removal from the balance sheet occurs only after substantially all risks and rewards have been transferred to the transferee. This treatment assumes that the decline in financial assets is appropriate only where the transferor retains no benefits or risks associated with the asset transferred.

Economic Control and Financing Standards

The concept of control is linked to the ability to generate profit through use. Economic control requires both the ability to use the element and to do so for personal gain. According to the Bank of Spain and NIF, economic control consists of a decision unit where an entity's assets are presumed to be controlled by another when there is evidence related to:

• Legal rights
• Voting power
• Veto rights