Balance Sheet and Goodwill

Topics: Balance sheet, Intangible asset, Goodwill Pages: 4 (1450 words) Published: April 17, 2002
Goodwill is an intangible asset, probably the most intangible of all intangible assets, hard to measure and even more difficult to account for. Goodwill today constitutes a much larger part of acquisition prices than it did previously, resulting in a much greater impact on financial statements. During the twentieth century the concept of goodwill has changed significantly. In the earlier days goodwill was thought of as the good and valuable relationships of a proprietor of a business with his customers. The present concept is broader in that it encompasses many more intangible economic factors of a business enterprise and accountants now consider that goodwill results from the evaluation of the earning power of a business by investors (Johnson, 43). From an accountant's perspective, goodwill appears in accounts of a company only when the company has purchased some intangible and valuable economic source. Intangibles such as patents and copyrights are examples of identifiable intangible assets. On the other hand, intangibles such as favorable government regulations, outstanding credit ratings, superior management and good labor relations are examples of unidentifiable intangible assets (Tweedie, 27). Goodwill comprises the complete set of unidentifiable intangible assets held by the reporting entity. Generally, goodwill has appeared to be an umbrella concept embracing many features of a company's activities that could lead to superior earning power, such as excellent management, an outstanding workforce, effective advertising and market penetration. Goodwill definitions may be defined in two different ways: the residuum approach and the excess profits approach. In the residuum approach, goodwill is defined as the difference between the purchase price and the fair market value of an acquired company's assets. Goodwill is a leftover amount that cannot be identified, after a thorough investigation, as any other tangible or intangible asset. In the excess profits...
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