08-26-2009, 04:14 PM
Goodwill as a term was originally used to reflect the fact that an ongoing business had some "intrinsic value" beyond its assets, such as the reputation the firm enjoyed with its clients. Likewise, a buyer may agree to "overpay" because he sees potential synergy with his own business. The accounting sense of goodwill followed as a plausible explanation of why a firm sells for more than the value of its net assets.
The carrying value of an asset with associated goodwill may subsequently be adjusted by management, either by amortization or by means of occasional adjustments of the estimated value of the associated assets (primarily based upon their ability to generate cashflow and profits). The exact treatment and other details, particularly amortization, will depend on the accounting standards applied.
There is a distinction between two types of goodwill depending upon the type of business enterprise institutional goodwill and professional practice goodwill. Furthermore, goodwill in a professional practice entity may be attributed to the practice itself and to the professional practitioner.
It should also be noted that while goodwill is technically an intangible asset, goodwill and intangible assets are usually listed as separate items on a company's balance sheet
Calculations
Goodwill = Purchase Price Fair Market Value of Net Assets
Fair Market Value of Net Assets = Net Tangible Assets + Write-up of Net Assets
Net Tangible Assets = Assets Target's Existing Goodwill Liabilities
As can be seen, a merger destroys the target's "old" goodwill and creates "new" goodwill to appear in consolidated books. Net assets write-up is prepared through a qualified appraisal in a process known as a Purchase Price Allocation.
The carrying value of an asset with associated goodwill may subsequently be adjusted by management, either by amortization or by means of occasional adjustments of the estimated value of the associated assets (primarily based upon their ability to generate cashflow and profits). The exact treatment and other details, particularly amortization, will depend on the accounting standards applied.
There is a distinction between two types of goodwill depending upon the type of business enterprise institutional goodwill and professional practice goodwill. Furthermore, goodwill in a professional practice entity may be attributed to the practice itself and to the professional practitioner.
It should also be noted that while goodwill is technically an intangible asset, goodwill and intangible assets are usually listed as separate items on a company's balance sheet
Calculations
Goodwill = Purchase Price Fair Market Value of Net Assets
Fair Market Value of Net Assets = Net Tangible Assets + Write-up of Net Assets
Net Tangible Assets = Assets Target's Existing Goodwill Liabilities
As can be seen, a merger destroys the target's "old" goodwill and creates "new" goodwill to appear in consolidated books. Net assets write-up is prepared through a qualified appraisal in a process known as a Purchase Price Allocation.