Business goodwill is an intangible asset owned by and associated with the operation of a company. Goodwill is the premium tha😼t is paid when a business is acquired. If a business is acquired ꦑfor more than its book value, the acquiring business is paying for intangible items such as intellectual property, brand recognition, skilled labor, and customer loyalty.

Understanding Goodwill

As noted above, goodwill is an intangible asset. Proprietary or 澳洲幸运5官方开奖结果体彩网:intellectual property and brand recognition are reflected in goodwill. While goodwill is not easily quantifiable, it can be calculated by taking the purchase price of a company and subtracting the difference between the 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) of the assets and liabilities.

Companies must record the value of goodwill on their financial statements and record any 澳洲幸运5官方开奖结果体彩网:impairments. While intangible assets typically have a finite useful life, goodwill is considered indefiniꦓte.

Goodwill's Effects on Corporate Value

The effect of goodwill on a company's value is better understood by learning the factors that 澳洲幸运5官方开奖结果体彩网:create business goodwill. The three factors in the creation of a company's goodwill include its going concern value, excess business income, and 🐻the expectation of future economic benefits.

1. The going concern value indicates that the company can produce income by applying existing capital (equipment, employees, management, and resources) effectively.
2. The excess 澳洲幸运5官方开奖结果体彩网:business income implies that a company is earning additional income due to the presence of its goodwill.
3. The overall value further increases when expectations for economic growth are added to the equation. A company is expected to attract new customers and create more products, resulting in combined wealth.

How Goodwill Is Determined

A business's goodwill is calculated by subtracting the FMV of the tangible assets from the total business value. 澳洲幸运5官方开奖结果体彩网:Business goodwill is also determined by the 澳洲幸运5官方开奖结果体彩网:capital surplus earnings method, which doe༺s the following three things:𒐪

1. Calculates the fair market value of the business assets
2. Determines the fair rate of return on said assets
3. Subtracts the return from the company's total earnings

🅘 The resulting excess earnings are considered the goodwill of the company.

Example of a Goodwill Calculation

Here's a hypothetical example to show how goodwill is calculated. Let's say that Company A acquires Company B for $4 million. Company B has assets equaling $2.8 million and liabilities equaling $400,000. The net assets of Company B are $2.8 million minus $400,000, which equals $2.4 million.

In this case, go♛odwill equals $1,600,000, or $4 million minus $2.4 million. This means that Company A paid a $1.6 million premium above the company’s net assets to acquire its assets, which added to its earning power. The goodwill account is located in the assets section of the balance sheet.

The Bottom Line

Goodwill represents intangible assets or those that can't be held but still provide companies with a great deal of value. These include things like brands, intellectual property, and trademarks. Companies invest a lot in their goodwill, so it's no surprise that they take many steps to protect it. Goodwill can be impaired, though, if its fair market value is below what's listed on the company's financial statements.