goodwill

Goodwill

Excess of purchase price over fair market value of net assets acquired under the purchase method of accounting.

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Goodwill

Intangible assets relating to a company's business practices. Goodwill includes assets with value that are exceptionally difficult to quantify. Examples include brand recognition, customer loyalty, and employee happiness. Goodwill helps a company remain competitive in the long term, even if the company does not produce the best product. For example, a customer will be more likely to buy peanut butter from one company and pay more for it, if he/she thinks the company produces better-tasting peanut butter, regardless of whether or not this is the case. When a company buys another company, it will often pay above the target company's book value to account for goodwill.

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goodwill

1. The amount above the fair net book value (adjusted for assumed debt) paid for an acquisition. Goodwill appears as an asset on the balance sheet of the acquiring firm and must be reduced in the event the value is impaired.

2. The discounted value of a larger-than-normal return on tangible assets. A business may build goodwill over time as loyalty builds among its customer base.

Case Study The Financial Accounting Standards Board (FASB), the body charged with establishing generally accepted accounting standards, in 2001 changed the method by which companies account for goodwill. Goodwill is posted as an asset to a firm's balance sheet when the firm makes an acquisition for above net asset value. In other words, goodwill is created when a firm pays more than the accounting value of a firm's assets adjusted for its debts. Huge amounts of goodwill were created in the late 1990s and early 2000s when the merger and acquisition business was progressing at full steam. Prior to 2002 companies were required to write down, or deduct, a prescribed amount of goodwill each accounting period. Thus, firms that engaged in major acquisitions at high prices posted large amounts of goodwill that had to be written off over a period of years. Goodwill writeoffs increase expenses and reduce reported earnings to shareholders. Prior to the change in accounting standards, companies were required to amortize goodwill regardless of how much the acquired assets were actually worth. Under the new standard imposed by the FASB in 2001 goodwill does not have to be reduced in value until it is determined the acquisition that created goodwill is no longer worth the purchase price. This change was expected to result in substantially higher reported earnings for companies with large amounts of goodwill on their balance sheets. For example, AOL Time Warner had $127 billion in goodwill on its balance sheet at the time of the change and was expecting to report substantially higher earnings because of the change in standards. On the downside, the firm announced in March 2001 it would incur record charges of $54 billion in goodwill impairment in the first quarter.

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goodwill

An intangible asset consisting of the public esteem in which a business is held.When a business is sold, the difference between the value of the hard assets and the value of the income stream is often attributed to goodwill. One may not depreciate goodwill, but it can be amortized over 15 years because of its inclusion in the IRS definition of Section 197 intangibles.

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Goodwill

What Does Goodwill Mean?

An account recorded in the assets portion of a company's balance sheet. Goodwill often arises when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets.

Investopedia explains Goodwill

Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset such as buildings and equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations, and patents or proprietary technology.

Related Terms:
• Balance Sheet
• Book Value
• Generally Accepted Accounting Principles—GAAP
• Intangible Asset
• Tangible Asset

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Goodwill

Goodwill is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor.