Goodwill: Difference between revisions

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Revision as of 01:13, 15 June 2005

For the article about the charity: see Goodwill Industries

Goodwill is an accounting concept that describes the value of a business entity not directly attributable to its physical assets and liabilities.

For example, a software company may have physical assets of some desktop PCs, servers, office equipment etc valued at $1 million, but the company's overall value (including brand, customer, intellectual capital) is valued at $10 million. Anybody buying that company would show $10 million total assets comprising $1 million physical assets, and $9 million in goodwill.

Goodwill is often included on a balance sheet as an asset, but its valuation may be suspect if supporting evidence like an independent survey is missing. Goodwill is forced onto the balance sheet when a company is purchased for more than the sum of the value of the assets of the company. The difference between the purchase price and the sum of the assets is by definition the value of the "goodwill" of the company.

For example:

A quality provider of goods or services builds up a good reputation (UPS, L.L. Bean).
A brand name controlled by the business becomes recognizable by a large part of the population (Tide, Cheerios).

Goodwill is no longer amortized under U.S. generally accepted accounting principles (GAAP). As of January 1st, 2005, it is also forbidden under International Accounting Standards Goodwill can now only be impaired (Impairment-only-approach).

Since in general intellectual property is part of goodwill, the most important asset of knowledge-based companies does not appear at all on formal balance sheets. But it is the IP that generates profit, not the buildings or the cash a company holds. One effect is that many ratios used to value companies can change greatly when meaningless physical assets are rearranged. The lack of documentation about the most significant asset of modern companies hinders investors and regulators.

Goodwill also means simply to have the will to do good in a community, or, to simply try to help people who are in need (for example, serving at a soup kitchen or at a homeless shelter).

Other examples:

The will to do good.
The effort to help out or support others.
Willing to help out in an effort to make things better.

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 Goodwill is no longer [[Amortization_%28business%29|amortized]] under U.S. generally accepted accounting principles ([[GAAP]]). As of January 1st, 2005, it is also forbidden under [[International Accounting Standards]] Goodwill can now only be impaired (Impairment-only-approach).
-Since in general [[intellectual property]] is part of goodwill, the most important asset of knowledge-based companies does not appear at all on the formal balance sheets. But it is the IP that generates profit, not the buildings or the cash a company holds. One effect is that many ratios used to value companies can change greatly when meaningless physical assets are rearranged.
+Since in general [[intellectual property]] is part of goodwill, the most important asset of knowledge-based companies does not appear at all on formal balance sheets. But it is the IP that generates profit, not the buildings or the cash a company holds. One effect is that many ratios used to value companies can change greatly when meaningless physical assets are rearranged. The lack of documentation about the most significant asset of modern companies hinders investors and regulators.
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