What Is Goodwill In Accounting

Goodwill means good reputation of a company’s business in the market. Such reputation makes popular company among its customers. Examples are Good Customer Relationships, Quality Management, etc. Is Goodwill An Intangible Asset? Goodwill is an example of Intangible Non Current Assets and it is further categorized under Indefinite Intangible Non Current Assets and recorded on Balance Sheet. Now, there is no need to calculate amortization on Goodwill after 2001 changes. Impairment is charged on it. Goodwill having Useful Life upto the maximum of 40 years.

Kinds / Types of Goodwill

(i) Internally Created (ii) Acquired By Acquirer From Acquiree Company

Goodwill, now a days, no longer be created internally but it is mostly created by purchasing another company (Acquiree) business that has valuable Goodwill in the form of Good Customer Relationships, Quality of Service, etc.

How To Estimate Goodwill

1. Acquirers are willing to pay for the price of future cash flows expected from these good attributes of Acquiree company. The acquirer also looks for earnings of the Acquiree company in Past Accounting Periods. If the earnings are more than average or normal earnings and it believes that it will continue after acquiring the business, then, it will purchase that company as it gives more returns on purchase of this Company’s net identifiable assets (All Assets Except Goodwill - Liabilities). For Example, if the company’s average earning for the past 5 years is Rs. 30000 and fair return on net identifiable asset is:

Fair Market Value X Normal Rate of Return on net identifiable assets = 200000 X 10% = Rs. 20000

then the Acquirer Company is willing to purchase the business of Acquiree as Actual Average Earnings are more than on return on net identifiable assets.

2. Acquirer Company can also Multiply of Actual Average Earnings 5 to 6 times and then deduct the value of Net Fair Market Value of Identifiable Assets from it in order to find the estimate value of Goodwill. In the above example, when we multiply Actual Average Earnings for last 5 years i.e., 30000 by 6, then deduct Net Fair Market Value, we get Rs. 160000 (180000 - 20000.

Who Owns Goodwill?

In Case of Liquidation of a Company or sale of a Company's Assets , the question, “Who Owns Goodwill” arises i.e., whether Goodwill is owned by Company or Shareholders and Employees. If the company owns Goodwill, then Sale of Assets including Goodwill are affected but if it is owned by Shareholders and Employees (Personal Goodwill) and does not disclose in the Company Financial Statements or  Shareholders And Employees sold it separately, then this is also a case of selling of Goodwill owned by shareholders or employees.

So, Goodwill is the Value of Positive Attributes that an acquirer company is willing to pay in order to get these Favourable Attributes to Stabilize its Business and gain success in the business.