Goodwill is considered a capital asset. Although it may be an internally developed asset, goodwill is most commonly derived from the acquisition of one company by another company at a premium value. Included in the term goodwill can be things like a compan༒y's customer list, the value associated with a brand name, solid customer relationships, loyal employees, and pr𒉰oprietary technology.

What Is Goodwill?

As noted above, goodwill is an intangible asset. This means that it is non-physical, so it can't be held or physically manipulated. Some common examples of goodwill include brands, customer▨ service and loyalty, intellectual property, and talent.

Companies can create goodwill on their own. But, in many cases, it is acquired when one company buys another. For instance, 澳洲幸运5开🧔奖号码历史查询:Google p🍌aid $1.65 billion for YouTube in 2006. The purchase allowed Google to acquire the video-sharing site's subscribers, which is considered goodwill. Similarly, Microsoft's $26.2 billion purchase of LinkedIn in 2016 allowed the technology company to access the professional networking site's "massive user base."

Goodwill is created after the company creates it or acquires it from another company for an amount over its net value. One key thing to remember is that goodwill doesn't 澳洲幸运5开奖号码历史查询:depreciate like physical assets.

Understanding Capital Assets

A capital asset is any asset that is not regularly sold as part of a company's ordinary business operations. Rather, it is owned and maintained because of its ability to help the company generate a profit.

Capital assets are expected to help a company generate additional profits or be of some benefit to the company for longer than a year. A tangible capital asset is typically included on a company's balance sheet in the figure representing 澳洲幸运5开奖号码历史查询:plant, property, an🃏d equipment (PP&E).

What is considered a capital asset can depend a great deal on the type of business where the asset is utilized. For some companies, capital assets represent the overwhelming majority of the firm's total assets. 

Goodwill is invariably classified as a capital asset because it meets the basic requirement for capital assets—it provides an ongoing revenue generation benefit for a period that extends beyond one year.

Evaluating Goodwill

Goodwill is not physical and is considered to be an 澳洲幸运5开奖号码历史查询:intangible asset. It is noted as such on a company's balance sheet. I𝓀ts value refers to or coincides with the amount over book value that one company pays when acquiring another. Having said that, it is very difficult to assign an accurate value or price to it because it is intangible.

But, it can—at a minimum—be assumed to represent some 澳洲幸运5开奖号码历史查询:increase in a company's value. The nature of goodwill, having components with subjective values, does present the potential risk of overvaluation. In the case of an acquisition, for shareholders of the 𓄧acquiring company, overvalued goodwill may cause share values to fall.

According to the Internationꦕal Financial Reporting Standards (IFRS), the inexact nature of the value of goodwill means that it cannot be amortized, but it must be re-evaluated every year by the company's management.

If the 澳洲幸运5开奖号码历史查询:fair market value falls below the historical cost (or the cost at which it was purchased), an impairment must be recorded to indicate the reduction in the goodwill's fair market value. An increase in fair market value, however, does not have to be documented in a company's financial statements. The calculation of goodwill deducts the fair market value of the acquired company’s assets and liabilities from the amount for which th🌜e company was purchased.

The Bottom Line

Goodwill can be created by a company or acquired if it buys another company. Although it doesn't have a physical shape, goodwill is a valuable asset—one that is considered a capital asset. Unlike other (usually tangible) assets, capital assets aren't sold during the normal course of business for a company. They provide a great deal of value for the company, which is why goodwill is often sold at a premium when one company acquires another.