Explanation:
Self-generated goodwill is not recorded in the books as per AS-26. Goodwill can only be recognized when it is acquired through a business combination. Below are the details explaining why self-generated goodwill is not recorded:
- Definition of goodwill: Goodwill is an intangible asset that represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.
- Recognition criteria: According to AS-26, goodwill can only be recognized when it is acquired through a business combination. This means that goodwill arising from self-generated intangibles, such as brand reputation, customer loyalty, or internal research and development, cannot be recognized in the books.
- Measurement: Goodwill recognized in a business combination is measured as the excess of the cost of the business combination over the fair value of net assets acquired. Since self-generated goodwill does not meet the recognition criteria, it should not be recorded in the books.
- Impairment testing: Goodwill recognized in a business combination is subject to impairment testing at least annually. However, self-generated goodwill that is not recognized in the books does not need to undergo impairment testing.
In conclusion, self-generated goodwill is not recorded in the books as per AS-26. Goodwill can only be recognized when it meets specific criteria related to business combinations.