Tuesday, 23 August 2016
The goodwill of a company
Hello readers, today I will be writing about the goodwill of a company. Goodwill is an intangible asset that is calculated upon the acquisition of a company by an individual, a group of individuals or a company. Goodwill should include the good reputation of a company, going concern (whether the future of the company looks prosperous or bleak) of a company, employee relations and customer relations and others. As such , the goodwill can not be separately identified without the sale. There are some other intangible assets but they are not part of the goodwill, this include the patent right, licenses, trademarks and others.
Goodwill could be negative, this happens when the fair market value of the company is lower than the value of the total asset. Then a loss is made by the seller, this represents the negative goodwill. When a sale is made to a buyer and the seller makes a gain from the sale, a situation where the fair market value is higher than the value of the asset of the company then the seller is said to have goodwill which is the difference of both values. This will reflect on the financial statement of the buyer as a non-current asset.
Fair market value is the estimated reasonable amount a buyer is willing to pay a seller for a property this includes a company. Both the buyer and the seller must accept the price before it can be called a fair market value. Once the sale has been made the buyer is then allowed to reflect the goodwill on its financial statement.
Goodwill can be impaired and it must be tested annually for impairment. Impairment can occur when the fair market of the value drops or when the asset they bought along with the company does not perform the way it used to perform. Once it has been impaired, it must be adjusted for accordingly on the financial statement. That is all for today.
Thank you for reading this article. Keep checking my blog regularly, Cheers!