What Is Goodwill?

Sometimes a company’s most valuable assets are impossible to touch or see. These assets are called intangible assets and include a compa🍬ny's brand, a l♍oyal customer base, or a corporation's stellar management team.

Understanding Goodwill

If a company wants to acquire another company, it purchases its 澳洲幸运5开奖号码历史查询:fixed assets such as 澳洲幸运5开奖号码历史查询:property, plant, and equipment, and the intangible assets. For example, if Pepsi wanted to acquire Coca-Cola, Coca-Cola's value extends beyond the value of the manufacturing plants, equipment, and the bottling companies it might own. The Coke brand also has substantial value. As a result, the acquirer must account for these more elusive qualities. The amount the buyer pays beyond the 澳洲幸运5开奖号码历史查询:book value of these identifiable assets is recorded as a separate asset called goodwill.

How Goodwill Is Treat🌟ed in the F༺inancial Statements

Since goodwill is an intangible asset, it is recorded on the澳洲幸运5开奖号码历史查询: balance sheet as a 澳洲幸运5开奖号码历史查询:noncurrent asset. A noncurrent asset is a long-term asset similar to fixed assets like property, plant, and equipment. There are guidelines stipulated by the for determining the value of goodwill for a company.

Let’s say a clothing retailer, the fictitious Teal Orchid, has identifiable assets of $750,000 that include the current value of its 澳洲幸运5开奖号码历史查询:real estate, inventory, cash, and accounts receivables. A larger com✤pany, Samantha & Steve Fashions, purchases the clothier and agrees to pay $850,000. Why? Teal Orchid has a strong reputation and brand recognition in the area that it operates. The acquiring company hopes it can use the brand name of Teal Orchid to boost profits in the long term and ultimately earn e🃏nough to make up for the extra $100,000 it paid above the value of the company's fixed assets.

The $100,000 beyond the value of its other assets is accounted for under goodwill on the 澳洲幸运5开奖号码历史查询:balance sheet. If the value of goodwill rem💞ains the same or increases, the amount entere👍d remains unchanged.

The amount can change, however, if the goodwill declines. If that’s the case, the company undergoes what’s known as 澳洲幸运5开奖号码历史查询:goodwill impairment. Perhaps, a year after the acquisition, the Teal Orchid division is only worth $800,000 in total (versus the original $850,000). Not only does the amount of the asset take a hit, but so do Samantha and Steve’s earnings. That’s because they must now record that $50,000 impairment as an expense on the 澳洲幸运5开奖号码历史查询:income statement. 

While such 澳洲幸运5开奖号码历史查询:write-downs don’t always attract much attention from the investment community, they do reflect the merger’s success or lack thereof. If the 澳洲幸运5开奖号码历史查询:parent company has to keep revising its goodwill amount, it is often a sign that it overpaid for another business and doesn't see the expected🍰 returns.

Special Considerations

By definition, companies with a large amount of goodwill attract higher 澳洲幸运5开奖号码历史查询:purchase prices. If the 澳洲幸运5开奖号码历史查询:goodwill amount is written down after the acquisition, it could indicate that the buyout is not working out as planned. In short, goodwill impairment is a message to the markets that the value of the acquired assets has fallen below the amount that the ♎company initially paid.