goodwill

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Goodwill

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

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.

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.

goodwill

the difference at a particular time between the STOCK MARKET valuation of a FIRM and the sum of its NET ASSETS recorded in a BALANCE SHEET. If another firm wishes to acquire this firm, goodwill represents the premium which the buyer must be prepared to pay for the firm over and above its asset value, because of the firm's trade contacts, reputation, established BRAND names, management expertise and general ‘know-how’. Where a firm has a poor trading record its market value as a going concern to a potential buyer may be less than the balance sheet value of its assets, in which case goodwill is negative.

Goodwill is an intangible FIXED ASSET and may be shown in a company's balance sheet. However, many companies write off the goodwill premium which they pay to acquire a new subsidiary company immediately against their current year's profits with the result that goodwill does not appear in their balance sheets.

goodwill

the difference at a particular point in time between the market valuation of a FIRM and the sum of its (net) ASSETS recorded in a BALANCE SHEET. If another firm wishes to acquire this firm, goodwill represents the premium that the buyer must be prepared to pay for the firm, over and above its asset value, because of the firm's trade contacts, reputation, BRAND names, management expertise and general ‘know-how’. Where a firm has a poor trading record, its market value as a going concern to a potential buyer may be less than the BALANCE SHEET's value of its assets, in which case goodwill is negative.

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.

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.
References in periodicals archive ?
In 1970, APB Opinion 17 ("Intangible Assets") expressed the presumption that externally purchased goodwill (like other intangibles) had a finite life and should be amortized in determining net income.
* Purchased goodwill should be amortized on a straight-line basis over its useful life, not to exceed 20 years [a change from the 40-year maximum allowed by APB Opinion 17].
These results are not directly applicable to the proposed test for goodwill impairment because such an impairment test is for a specific asset, purchased goodwill, within an individual firm or reporting unit within the firm.
Walters said, "The IASC proposal would specify a useful life of no more than five years for purchased goodwill unless a longer period can be justified, which should not, in any case, exceed 20 years" [3:85].
These are inherent goodwill and purchased goodwill. Inherent goodwill is the presence of goodwill which must be inferred from external manifestations.
This full goodwill method recognizes not only the purchased goodwill attributable to an acquirer as a result of the purchase transaction, but also the goodwill attributable to a noncontrolling interest in the subsidiary.
This is the same procedure used for purchased goodwill, except it likely understates goodwill, since most acquirers pay a premium over the current share price.
Many accountants believe that the original value of purchased goodwill decreases over time and that it should be systematically and rationally amortized against income.
Goodwill is recognized under either a full or purchased goodwill interpretation.
FASB has softened the impact of eliminating pooling by requiring that purchased goodwill be reviewed for impairment rather than be amortized.
Essentially, the project will address 1) whether there is a need for two methods of accounting for business combinations, and 2) how purchased goodwill should be accounted for.
First, the FHLBB allowed the acquiring thrift to include the purchased goodwill in its calculation of regulatory net worth.

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