Definition of Goodwill - Assignment Point
Definition of Goodwill
Subject: Accounting | Topics:

Definition of Goodwill

Assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets. Goodwill is an intangible but salable asset, almost indestructible except by indiscretion.

It is built painstakingly over the years generally with

1) heavy and continuous expenditure in promotion,

(2) creation and maintenance of durable customer and supplier relationships,

(3) high quality of goods and services, and

(4) high quality and conduct of management and employees. Goodwill includes the worth of corporate identity, and is enhanced by corporate image and a proper location. Its value is not recognized in account books but is realized when the business is sold, and is reflected in the firm’s selling price by the amount in excess over the firm’s net worth. In well established firms, goodwill may be worth many times the worth of its physical assets. GAAP require the firm’s purchaser to write off (amortize) the amount paid as goodwill over a period (usually 10 to 30 years) for financial reporting purposes.Goodwill shows the value of a firm’s reputation. When a firm has a brand with a certain reputation and particular status within the market, this can be measured to have a lesser or greater value. If this is a postive value, then it is called goodwill. Goodwill is a fixed asset – something that has value in the company for an extended period.

Since goodwill is not something that can be touched or felt, it can occasionally be difficult to calculate what it is worth. This is why goodwill is also an intangible asset in accounting.

Goodwill can be valued as the difference between the value of the seperable net assets of a firm and the total value of the firm.

Adding to a company’s value

There are many factors that may be valuable when calculating goodwill, other than reputation:

  • When a firm has a dedicated and solid customer base, goodwill can be found. If customers have respect for a company, they can potentially share a positive message and recommend the firm to others, ultimately bringing more capital to the enterprise.
  • If a company has run a major advertising campaign the effect of this can also influence a company’s goodwill.
  • Also, added value can be be found in new agreements, integrations or partners, which are known to bring in new income.

All in all, goodwill can be characterized as something that may generate future returns in the company.

In the accounts

Goodwill may be written off to reserves or recognized as an intangible asset in the balance sheetand written off by amortization to the profit and loss account over its useful economic life.

Goodwill – is it taxed?

Goodwill is an asset, so it is taxed under the same rules as other intangible assets (such as dividend and rental agreements, trademark right, etc).

What is badwill?

When goodwill is found in the negative form, it is called badwill.

Badwill is what causes a company’s worth to decrease when shareholders and the investment community find out that the company has done something that is not alligned with good business practices.

A company can be negatively affected by badwill in many ways. Badwill could appear in the form of a decrease in revenues, a loss of suppliers and clients, or a decrease in market share, not to mention as any federal indictments for crimes that may have been committed.

Goodwill

Related Accounting Paper: