Written by Fmi.Online Friday January 6, 2023
Goodwill is a company’s value that exceeds its assets minus its liabilities. In other words, goodwill shows that a business has value beyond its actual physical assets and liabilities. This value can be created from the excellence of management, customer loyalty, brand recognition, favorable location, or even the quality of employees. Anything that adds value to the company beyond its excess assets over liabilties  is considered goodwill.

Explanation :

Even though goodwill is technically considered an asset, it is not always reported on the balance sheet. Why not, because valuing a business is very subjective and can’t be measured easily or accurately. For example, how much would you value a two-year-old company that distributes its products for free and has never made a penny of revenue? Not much, right? Well, Facebook thought Instagram was worth $1 billion. To other firms, Instagram might have only been worth $500 million. Who can put a specific value on a company like that? No one can. This is why GAAP requires that goodwill can only be recorded when an entire business or business segment is purchased. An actual figure or dollar amount must exist in order to record and report it as an intangible asset on the balance sheet. Estimating the full amount is not allowed. 

In a  nutshell :

  • Goodwill is an intangible asset  that accounts for the excess purchase price of another company.
  • Items included in goodwill are proprietary or intellectual property and brand recognition, which are not easily quantifiable.
  • Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities.
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