simple Meanining of Goodwill?

Pjdav

Hi Guys, I would appreciate the help. The book I'm studying doesn't really break it down

Zoynal98

Hi Pjdav,

Two definitions:

Goodwill is an intangible asset which occurs when a company acquires another company at higher price than its fair value (FV) (also known as market value/price). For example: ABC plc acquires XYZ ltd for £6m and the fair value of XYZ ltd is £5m, there is a premium of £1m (£6m (paid) - £5m (XYZ ltd FV) = £1m), this £1m will sit on the Statement of Financial Position as an Asset (Intangible) and will amortise (Depreciate) usually once a year.

Goodwill could also be internally generated by the company. For example, the brand of the company, reputation, customer service, patents etc.

An intangible asset does not have a physical form/substance.

Really useful resources:
http://www.investopedia.com/terms/g/goodwill.asp
https://www.iasplus.com/en/standards/ias/ias38

Hope this helps.

Bertie

Good post. A company shouldn't recognise its own internally generated goodwill. If goodwill sits in the accounts it must be tested to see if the value has shifted, eg impaired.