Goodwill

Marketing aims at building the reputation of enterprise over a time. The enterprise attempts to earn a name for it and build its position and builds its position in the market by selling quality products, at reasonable prices, through convenient sales outlets.

The term goodwill was actually used in the accountancy in order to reflect the fact that an ongoing business had some prudent value beyond its assets like reputation of the company enjoyed with its consumers. Similarly, a purchaser might agree to “overpay” since he or she sees potential synergy with his or her own business.

Goodwill in the financial reports occurs when the firm is purchased for more than fair price of its identifiable assets of the firm.  The distinction between the purchase value and the total of the fair price of the net assets is by definition the value of the goodwill of the acquiring firm. The purchased firm should consider goodwill as an asset in the financial reports of the company and show it as an individual line item on the balance sheet, based on the current purchase accounting system. In this case, goodwill serves as the balancing sum which enables one company to provide accounting data about its purchase of another company for a value or price considerably different from its book value. Goodwill could be negative, occurring where the net assets at the date of purchase, fairly valued, go beyond the cost of purchase. Negative goodwill is considered as a liability.

For instance, a software firm might have net assets (assuming no debt and comprising mainly of miscellaneous equipment) valued at one million dollars, however the firm’s total value (such as intellectual capital, customers, and brand) is estimated at ten million dollars. Anyone purchasing that form would book ten million dollars in total assets acquired, including one million dollars physical assets, and nine million dollars in goodwill.

Questionnaire:

• What is goodwill?
• What are the importance of goodwill?