Business, Legal & Accounting Glossary
Goodwill on acquisition is the difference between the fair value of the amount paid for an investment in a subsidiary and the fair value of the net assets acquired.
n. the benefit of a business having a good reputation under its name and regular patronage. Goodwill is not tangible like equipment, right to lease the premises or inventory of goods. It becomes important when a business is sold, since there can be an allocation in the sales price for the value of the goodwill, which is always a subjective estimate. Included in goodwill upon sale may be the right to do business without competition by the seller in the area and/or for a specified period of time. Sellers like the allocation to goodwill to be high since it is not subject to capital gains tax, while buyers prefer it to be low, because it cannot be depreciated for tax purposes like tangible assets. Goodwill also may be overestimated by a proud seller and believed by an unknowing buyer.
The value of a business to a purchaser over and above its net asset value. It reflects the value of intangible assets like:
and other factors which improve the company’s business.
Goodwill is normally given a value in a company’s balance sheet, but is amortised over a period of time.
For example, a software company may have physical assets of some desktop PCs, servers, office equipment etc valued at $1 million, but the company’s overall value (including brand, customer, intellectual capital) is valued at $10 million. Anybody buying that company would show $10 million total assets comprising $1 million physical assets, and $9 million in goodwill.
Goodwill is often included on a balance sheet as an asset, but its valuation may be suspect if supporting evidence like an independent survey is missing. Goodwill is forced onto the balance sheet when a company is purchased for more than the sum of the value of the assets of the company. The difference between the purchase price and the sum of the assets is by definition the value of the “goodwill” of the company.
Goodwill also means simply to have the will to do good in a community, or, to simply try to help people who are in need (for example, serving at a soup kitchen or at a homeless shelter).
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This glossary post was last updated: 28th April, 2020 | 7 Views.