What is the treatment of negative goodwill under UK GAAP?

Under UK GAAP, negative goodwill occurs when the fair value of a company's identifiable net assets is greater than the purchase price paid for a business. Instead of being recognized as a separate asset, negative goodwill is treated as a gain in the financial statements. This gain is recognized immediately in profit or loss rather than being amortized over a period similar to how goodwill is treated.

This treatment reflects the notion that acquiring a business for less than its net asset value represents a gain for the purchaser, who can then benefit from the positive difference between the value of the assets acquired and the cost paid. By recognizing this gain promptly, the financial statements provide a more accurate reflection of the company's financial performance post-acquisition.

Other options suggest recognizing negative goodwill as an asset or applying amortization, which do not align with current UK GAAP standards regarding the treatment of negative goodwill. The core principle is that the financial outcome of a purchase involving negative goodwill should be reflected immediately as a gain, signaling an advantageous transaction from the perspective of the acquiring entity.