Goodwill vs. Other In♏tangible Assets: A🔯n Overview

One of the concepts that can give non-accounting (and even some accounting) business folk a fit is a distinction between goodwill and other 澳洲幸运5官方开奖结果体彩网:intangible assets in a company’s financial statements.

Perhaps the confusion is to♑ be expected. After all, goodwill denotes the value of certain nonmonetary, nonphysical resources, and that sounds like exactly what an intangible asset is.

However, many factors separate goodwill from other intangible assets, and the two terms represent separate line items on a 澳洲幸运5官方开奖结果体彩网:balance sheet.

Goodwill

Goodwill is a miscellaneous 澳洲幸运5官方开奖结果体彩网:category for intangible assets that are harder to parse individually or measure directly. Customer loyalty, 澳洲幸运5官方开奖结果体彩网:brand reputation, and other nonquantifi🅘able assets count as goodwill.

Goodwill cannot exist independently of the business, nor can it be sold, purchased, or transferred separately. A company’s record of innovation and 澳洲幸运5官方开奖结果体彩网:research and development and the experience of its management team are often included, too. As a result, goodwill has an indefinite 澳洲幸运5官方开奖结果体彩网:useful life, unlike most intangible assets.

Goodwill only shows up on a balance sheet when two companies complete 澳洲幸运5官方开奖结果体彩网:a merger or an acquisition. When a company buys another firm, anything it pays a🥀bove and beyond the net vꦺalue of the target’s identifiable assets becomes goodwill on the balance sheet.

Say a soft drink company was sold for $120 million; it had assets worth $100 million and 澳洲幸运5官方开奖结果体彩网:liabilities of $꧋20 mil♔lion. The sum of $40 million that was paid over and above $80 million (the value of the assets minus the liabilities) is the worth of goodwill and is recorded in the books as such.

Look at this example of an assets ♔section of a balance sheet. Goodwill is ♓a separate line item from intangible assets.

Other Intangible Assets

Intangible assets are those that are nonphysical but identifiable. Think of a company’s 澳洲幸运5官方开奖结果体彩网:proprietary technology (computer software, etc.), copyrights, patents, licensing agreements, and website domain names. These aren’t things that one can touch, exactly, but it is ꦏpossible to estimate their value to the enterprise. Intangible assets can be bought and sold independently of the business itself.

There’s also a key distinction in how the two 澳洲幸运5官方开奖结果体彩网:asset classes are amended once they’re on the books. Because assets tend to lose some of their value over time, companies sometimes have to make periodic 澳洲幸运5官方开奖结果体彩网:write-downs.

Intangible assets are 澳洲幸运5官方开奖结果体彩网:amortized, which means a fixed amount is marked down every year, resulting in a simultaneous charge against earnings. The amortization amount is adjusted if the asset’s value is impaired𒆙 at some point after its acquisition or development.

Key Differences

While “goodwill” and “intangible assets” are sometimes used🎃 interchangeably, there are significant differences between the two terms in the accounting world.

Goodwill is a 澳洲幸运5官方开奖结果体彩网:premium paid over the fair value of assets during the purchase of a company. Hence, it is tagged to a company or business and cannot be🅷 sold or purchased ܫindependently. In contrast, other intangible assets like licenses, patents, etc., can be sold and purchased separately.

Goodwill is perceived to have an indefinite life (as long as t🐭he company operates), while other intangible assets have a definite useful life.

Special Considerations

In 2021, the Financial Accounting Standards Board (FASB) came up with an alternative rule for the accounting of goodwill. Before 2001, it could be amortized over a period of 40 years. A 2001 ruling decreed that goodwill could not be amortized but must be evaluated annually to determine 澳洲幸运5官方开奖结果体彩网:impairment loss; this annual valuation process was expensive as well as time-consuming.

As per the alternative FASB rule in 2021 for private companies, goodwill can be amortized on a 澳洲幸运5官方开奖结果体彩网:straight-line basis over a period not to exceed 10 years. The need to test for impairment has decreased; instead, an impairment charge is recorded when an event signals that the fair value may have gone below the carrying amount.

These rules apply to businesses conforming to 澳洲幸运5官方开奖结果体彩网:generally accepted accounting prin🌟cipl𓆉es (GAAP) using a full 澳洲幸运5官方开奖结果体彩网:accrual accounting method. If conditions indicate that the 澳洲幸运5官方开奖结果体彩网:carrying value may not be recoverable, impairment tests are performed.

Small businesses using 澳洲幸运5官方开奖结果体彩网:cash basis accounting or 澳洲幸运5官方开奖结果体彩网:modified cash basis accounting can use the statutory rates set by the Internal Revenue Service (IRS). The IRS allows for a 15-year write-off period for the intangibles that have been purchased. There is a lot of overlap and contrast between the&🉐nbsp;IRS and GAAP reporting.

The Bottom Line

As mentioned above, goodwill only shows up on a balance sheet w💙hen two companies complete a 🍃merger or an acquisition.

Other intangible assets appear on a balance sheet only if they are acquired through a purchase—rather than being internally developed—and therefore, they have an identifiable value and identifiable lifespan. They’re included on the balance sheet as 澳洲幸运5官方开奖结果体彩网:long-term assets and valued according to their price and amortization sched𓂃ules.

This is just one of the many factors that separate goodwill from other intangible assets.