Goodwill is a common term that is used in accounting especially during business or company acquisition. It is an intangible asset that occurs when one company buys another company at a purchase cost, which is higher than its fair assets and liabilities.
A simple formula for this concept is
To expound further on the formula
G= The goodwill P= The purchasing cost A=Fair price of the tangible assets L=Fair price of the tangible liabilities
The tangible assets and the liabilities must be indefinable for the goodwill to be fair and easily determined. Some of the examples are proprietary, patent, advanced technology, company brand name, good customer relations, solid customer base and good employee relation among others.
Some of the key characteristics of this concept
Goodwill should be calculated by subtracting the purchasing price from the identifiable company's asset s and liabilities.
The calculation is a requirement for the companies to evaluate it in their financial statements and record in impairments at least once in a year.
Although this concept is an example of an intangible asset, it is however very different from the nature of other intangible assets. For the goodwill, it has indefinite life while the other intangible assets are subject to definite useful life.
erally accepted when calculating goodwill of a company or a business.
These steps are:
When determining goodwill, the first step is to check on the recent set of the company's financial statement to get the value of all the assets. This can also be found by checking the balance sheet of the targeted company.
The book values should be of al assets such as the non –current assets, current assets or fixed assets as well as the intangible assets such as patent rights.
Although the fair values of an asset at the current market condition can be subjective. Getting an accountant can determine the fair value and later get the approval of each asset's fair value by the company management.
Make the necessary adjustments that can be significant for calculation. The adjustment can be effected by subtracting the fair value and the book value in each identifiable asset.
Determine the excess purchasing cost by simply getting the differences of the total purchasing price and the net assets value. The result is called the excess purchasing price.
This is the last step that you need to calculate the goodwill value of the target company.
In this case, the goodwill will be calculated as follows:
Excess purchase price- Fair value of the adjustments
When the goodwill is determined, it is recorded on the intangible asset section of the balance sheet of the acquiring company.
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