Goodwill ~ Introduction

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 Meaning of Goodwill

Goodwill is an intangible but not fictitious assets which means it has some realisable value. From the accountants’ point of view goodwill, in the sense of attracting custom, has little significance unless it has a saleable value. In considering the return normally to be expected, regard must be had to the nature of the business, the risks involved, fair management remuneration and any other relevant circumstances.

The goodwill possessed by a firm may be due, inter alia, to the following.
1.   The location of the business premises, the nature of the firm’s products or the reputation of its service.

2.    The possession of favourable contracts, complete or partial monopoly, etc.

3.    The personal reputation of the promoters.

4.    The possession of efficient and contented employees.

5.    The possession of trade marks, patents or a well-known business name.

6.    The continuance of advertising campaigns.

7.    The maintenance of the quality of the firm’s product and development of the business with changing conditions


Concept of Goodwill


When one company buys another company, the purchasing company may pay more for the acquired company than the fair market value of its net identifiable assets (tangible assets plus identifiable intangibles, net of any liabilities assumed by the purchaser). The amount by which the purchase price exceeds the fair value of the net identifiable assets is recorded as an asset of the acquiring company. Although sometimes reported on the balance sheet with a descriptive title such as “excess of acquisition cost over net assets acquired”, the amount is customarily called goodwill.


Example - 1


Company X acquires all the assets of company Y, giving Company Y Rs. 15 lakh cash. Company  Y has cash Rs. 50,000 accounts receivable that are believed to have a realisable value of  Rs. 60,000, and other identifiable assets that are estimated to have a current market value of Rs. 11 lakhs.


Solution 

This extra amount of Rs. 2,90,000 paid over an above, Net worth Rs. 12,10,000 is goodwill, which is a capital loss far purchasing company and to be shown on assets side of Balance Sheet. This entire amount will be written off against revenue profit, i.e., Profit and Loss Account over period of time.


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