theoretically, the present value of future excess earnings of a company over other companies in the industry. In other words, it is the value of the company’s name and reputation, its customer relations, and other factors that, although intangible, give a concern its competitive edge and produce better-than-typical future earnings. It can only be recorded in a business combination accounted for under the purchase (ACCOUNTING) method. Goodwill equals the purchase price less the book value of the acquired company’s net assets less the amount by which the acquired company’s depreciable assets are written up to their fair market value. The fair market value of the total going concern should be equal to the purchase price. For example, if XYZ Company paid $3,000,000 for the net assets of ABC Company having a fair value of $2,800,000, the excess of $200,000 represents goodwill. Goodwill is an intangible asset subject to an annual impairment test.
- intangible asset representing the difference between the purchase price of an asset and its fair market value. Goodwill is created when a bank pays a premium to acquire the assets of another bank in a take-over transaction. For example, bank ABC pays the shareholders of bank XYZ $100 per share for XYZ’s outstanding common stock, which has a book value per share of only $50. Bank ABC reports the difference ($50) as goodwill. Goodwill is also created when a bank pays a premium above estimated market value to acquire loans, credit card accounts, and so on.
Goodwill is a non-tax-deductible asset. It has no independent market or liquidation value, and accepted accounting principlesrequire that it be written off (amortized) over the time period in use. Goodwill and other intangibles do not qualify as Tier 1 bank capital after December 31, 1992, under risk-based capital guidelines.
- informally, an expression for good customer relations, employee morale, and a well-respected business name.
intangible but recognized business asset that is the result of such features as the production or sale of reputable brand-name products, a good relationship with customers and suppliers, and the standing of the business in its community.
intangible asset representing going-concern value in excess of asset value paid by a company for another company in a purchase acquisition. Under Financial Accounting Standards Board (FASB) rule 142 issued June 2001, goodwill cannot be amortized unless an impairment test is satisfied. Before that ruling, goodwill and related intangible assets were amortized and deducted on a straightline basis over a 15-year period.
monetary value of the reputation of a business. Goodwill is an intangible asset and thus may be difficult to measure.